Unlock Your Retirement Savings: Essential Guide to Safe Withdrawal Strategies

After years of saving for retirement, the big question arises: how should you spend that money?

The widely accepted guideline has been the 4% rule, which advises retirees to withdraw 4% of their total savings in the first year of retirement, adjusting this amount each year following to account for inflation, for a duration of 30 years.

However, some financial experts recommend a more personalized approach, taking into account individual health, expected lifespan, and family medical history. This method aims to balance the enjoyment of retirement funds with ensuring their longevity.

Historically, the 4% rule has been based on a 60/40 investment mix of stocks and bonds. This strategy is designed to prevent retirees from depleting their funds. Yet, this approach faced criticism after 2022, when the 60/40 portfolio experienced its worst performance since 1937 amidst rising inflation and interest rates.

Even the architect of the 4% rule, Bill Bengen, has remarked that the strategy may no longer be applicable today. He suggests that retirees should consider reducing their spending and withdrawal rates, as reported by The Motley Fool in 2022.

Advisors have noted that the uniform application of this rule doesn’t account for individual variability in lifespan, which can lead retirees either to overspend quickly or live too frugally, thereby missing out on enjoying their hard-earned savings.

“The 4% rule is actually a ‘96% problem,'” according to Tim Maurer, chief advisory officer at SignatureFD in Charleston, South Carolina. He believes that overly focusing on maintaining this specific withdrawal rate prevents retirees from fully enjoying the 96% of their portfolio.

Improving Predictions on Lifespan and Health

One of the greatest fears for many is outliving their retirement savings. To mitigate this, financial planners often assume a lifespan up to 95 years. However, this does not reflect the actual average lifespan, with studies from HealthView Services showing that many do not reach this age. For instance, less than 1% of Americans over 65 with diabetes are likely to live until 95.

“With more precise lifespan estimates, we could design more effective financial strategies tailored to individuals,” said Jay Jackson, CEO of Abacus Life. Knowing the actual expected lifespan of a client could significantly enhance financial planning.

More accurate data on longevity could lead to better predictions of an individual’s lifespan and healthspan, or the period of life spent in good health, experts suggest.

Enhancing Longevity Data Collection

Collecting detailed medical and family history is a critical step for financial advisors in crafting a spending plan that better matches an individual retiree’s circumstances, experts agree.

Jackson shares an example of a client, aged 76, whose health profile indicated a likely additional lifespan of 8-9 years, yet his retirement plan was set up as if he would live to 95. By recalibrating his plan to reflect his actual health profile, his monthly withdrawals nearly doubled, enhancing his quality of life significantly.

Is Personalized Retirement Planning Feasible for All Americans?

“Absolutely, personalized retirement plans are possible for everyone,” states Rob Burnette, an investment adviser at Outlook Financial Center in Troy, Ohio.

Many financial advisors view this tailored approach as the future of retirement planning, focusing on balancing lifespan with healthspan.

Burnette begins each client consultation by reviewing family and medical history, assessing factors like parental and grandparental longevity and existing health conditions to gauge probable lifespan.

Abacus Life extends this approach by incorporating extensive longevity databases and technology, and with appropriate permissions, can access a client’s medical records to refine lifespan predictions and planning.

While some might hesitate to provide access to their medical records, alternative methods like online health assessments can offer a preliminary lifespan estimation. However, advisors emphasize the importance of regular, personal updates to refine plans based on new health developments or improvements.

Jackson also mentioned the use of facial analytics to assess biological age, underscoring the importance of annual reviews. “We encourage a yearly reassessment,” Burnette adds. “With today’s technology, it’s straightforward. I prefer to see my clients face-to-face to ensure their current state aligns with what they report.”