NCPA - National Center for Policy Analysis


October 4, 2005

How much can you take out of your nest egg with out running out of money? The answer may be larger than the standard four percent quoted by many financial planners, says the New York Times.

The traditional rate is determined by risk-assessment studies that try to protect retirees by determining a rate that leaves very little chance of running out of money; but retirees generally spend more when they are in the early stages of retirement, says financial planner Ty Bernicke.

According to the Bureau of Labor Statistics' Consumer Expenditure Survey for 2002, spending in practically every category, from housing to clothing to entertainment, declines with age; the only category in which spending rises is health care:

  • People over 75 spend 26 percent less, on average, than those in the 65-to-74 age group.
  • The greater the age difference, the greater the difference in spending: those over 75 spent 46 percent less than those 55 to 64, and 51 percent less than those 45 to 54.

So, the rate could safely be increased to 6 percent, says Bernicke. Indeed, a study of market returns from 1973 to 2003 supports the 6 percent withdrawal rate, says financial planner Jonathan Guyton:

  • A person who retired in 1973, in the middle of a punishing bear market with very high inflation, could have supported a 6.2 percent initial withdrawal rate over 40 years with a portfolio with 80 percent in stocks.
  • A portfolio with 65 percent in stocks could have borne a 5.8 percent rate, and one with 50 percent in stocks could have supported a 5.4 percent rate.

Critics worry that medical costs will rise fast and destroy any well-constructed financial plan; to hedge against these expenses, retirees should buy insurance policies, says Bernicke.

Source: Ilana Polyak, "New Advice to Retirees: Spend More at First, Cut Back Later," New York Times, September 25, 2005; based upon: Ty Bernicke, "Reality Retirement Planning: A New Paradigm for an Old Science," Journal of Financial Planning, June 2005; Jonathan Guyton, "Decision Rules and Portfolio Management for Retirees: Is the 'Safe' Initial Withdrawal Rate Too Safe?," Journal of Financial Planning, October 2004.


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