A Simple Rule for Spending Down Retirement Savings

Evan Inglis, a fellow of the Society of Actuaries, and senior vice president in the Institutional Solutions group at Nuveen Asset Management, based in Chicago, says a 3% spending rule, rather than the traditional 4% rule, recognizes the lower level of returns we are likely to experience in coming years due to low interest rates and other factors such as demographic trends.

However, after advising different people and thinking about his own retirement, Inglis tells PLANSPONSOR he realized that as people got older, the ability to spend without worrying about depleting savings increases. So, in an essay written for the Society of Actuaries, he puts forth the “feel-free” spending rule—simply divide the retiree’s age by 20. For someone who is 70 years old, it’s safe to spend 3.5% (70/20 = 3.5) of her savings.

The rule would also work for someone, for example, at age 50 to see if they have enough savings to afford to retire.

“The ‘feel-free’ rule is simple and adaptable to a wide range of situations,” Inglis says. “People can adapt it to their comfort level or levels of return.” A table in his essay shows how with “feel-free” spending, retirees will be comfortable with earnings expected in different portfolio allocation scenarios, but the rate of spending is not so much lower than earnings that people are constraining their spending too much.

“The idea is that this level of spending should be appropriate for a wide range of portfolios, from 40% to 70% in equities. People can take more risk and get a higher level of return, but because they are taking more risk, they want to be conservative in spending relative to return. If they have a conservative portfolio, earnings are more predictable, so they can spend closer to the level of earnings they are anticipating,” he says.

Inglis notes that the impact of volatility will lower the level of earnings, so those with higher-risk portfolios may have to adjust their spending down. People should also consider investment management costs in deciding whether they need to bring their spending down.

At the other end of the spectrum, in his essay, Inglis says retirees can divide their age by 10 to get what he calls the “no more” level of spending. “If one regularly spends a percentage of their savings that is close to their age divided by 10 … then their available spending will almost certainly drop significantly over the years, especially after inflation is considered. Except for special circumstances like a large medical expense or one-time help for the kids, one should not plan to spend at that level,” the essay says.

Inglis says inbetween the two levels of spending, retirees need to think about a combination of annuity income and spending from savings. “Because the ‘feel-free’ level is pretty conservative, people will be able to feel confident in spending without adding an annuity, but above that, they will want annuity income as part of their retirement income solution,” he states.

But, Inglis concedes that if a person age 65 wants to spend more than his “feel-free” level of 3.25%, he can try 3.5% to 4% while being careful if there is a bad investment year or two. But, above that, the person needs to consider an annuity.

According to Inglis, the key thing for people is to understand is that returns will be lower in the future; they have still not fully adjusted their mindset to the likely level of returns in the future compared to what they are used to from the past. “Be conservative when thinking about retirement spending. The ‘feel-free’ rule should allow a comfortable, reasonable level of spending without retirees doing a lot of analysis and planning, which I see most people don’t have the inclination or expertise to do,” he concludes.

Inglis’ essay is at https://www.soa.org/Library/Essays/2016/diverse-risk/2016-diverse-risks-essay-inglis.pdf.