After years of diligently saving for retirement, the pressing question remains: how should you spend it effectively?
A common guideline is the “4% rule,” which suggests retirees withdraw 4% of their savings in their first retirement year and adjust annually for inflation over a 30-year period. However, some experts argue that a more tailored approach, factoring in health, potential lifespan, and family history, could provide a better balance between enjoying your savings and ensuring it lasts throughout retirement.
Rethinking the 4% Rule
The 4% rule was designed based on a traditional 60/40 portfolio (60% stocks, 40% bonds), aiming to prevent retirees from outliving their money. Yet, this approach has faced criticism, particularly after the 60/40 portfolio’s sharp decline in 2022 amid rising inflation and interest rates—the worst performance since 1937.
Even Bill Bengen, the creator of the 4% rule, has acknowledged its limitations. In recent years, he has suggested cutting spending and reducing withdrawal rates to account for market volatility.
The main criticism of the 4% rule is its one-size-fits-all approach. Financial adviser Tim Maurer describes it as the “96% problem,” arguing that focusing solely on the 4% figure can prevent retirees from enjoying the bulk of their wealth.
A Personalised Approach
For retirees with health conditions or shorter-than-average lifespans, the 4% rule may lead to unnecessary frugality. For instance, almost 30% of Americans aged 65 and older have diabetes, with less than a 1% chance of reaching age 95, according to HealthView Services. An average male with Type 2 diabetes may live until his late 70s, while a female might reach her early 80s.
“If people had an accurate lifespan estimate, we could design better financial products and spending strategies,” explains Jay Jackson, CEO of Abacus Life, which specialises in life insurance settlements.
Jackson recounts a case where recalibrating a retiree’s withdrawal plan to align with his health profile nearly doubled his monthly income while still leaving funds for unexpected costs. This extra income allowed for healthier meals, social activities, and light exercise—all of which contribute to a better quality of life.
Leveraging Longevity Data
Advisers are increasingly incorporating medical and family history into retirement planning to provide more accurate spending strategies. Questions about the longevity of parents and grandparents, along with personal health histories, help advisers assess genetic factors influencing lifespan.
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Abacus Life takes this a step further, using extensive actuarial data and technology. With a client’s permission, it accesses medical records to evaluate lifespan probabilities and tailor plans accordingly. However, many people may hesitate to share such sensitive information.
For those wary of releasing medical records, tools like the American Academy of Actuaries’ online form or Abacus’s health assessment tool offer an alternative starting point for gauging longevity.
Regular Updates are Key
A customised retirement plan requires ongoing adjustments. Regular meetings with advisers, whether in person or online, are essential to update plans based on new health developments or lifestyle changes. This flexibility ensures that plans remain aligned with both current circumstances and long-term goals.
Emerging technologies, such as facial analytics, are also being explored to estimate biological age, offering another layer of precision in longevity assessments.
The Future of Retirement Planning
The days of a one-size-fits-all approach to retirement spending are fading. Personalised strategies that consider individual health, family history, and lifestyle are increasingly recognised as the future of financial planning.
By adopting a more nuanced and flexible approach, retirees can strike the perfect balance between enjoying their hard-earned savings and securing their financial future.
