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Dispatches

A Simple Formula for Calculating “Safe” Retirement Spending

Evan Inglis, a senior vice president for Nuveen Asset Management, gives a simple “feel free” strategy that should provide enough money for expenses but also allow a retiree’s portfolio to grow.

The Society of Actuaries’ (SOA’s) Committee on Post-Retirement Needs and Risks awarded first prize to Evan Inglis, a senior vice president for Nuveen Asset Management, in a call for essays for his discussion about a simple strategy to determine how much can be safely spent in retirement.

Inglis calls his method the “feel free” spending level. The formula is simply a person’s age divided by 20. The resulting number is the percentage of savings a person can spend over and above any Social Security, pension or annuity-type income.

For example, a person who is age 70 can safely spend 3.5% of his or her savings (70 ÷ 20 = 3.5). A 60-year-old would be limited to 3% (60 ÷ 20 = 3.0), while an 80-year-old can spend 4% (80 ÷ 20 = 4.0).

The term “feel free” refers to the fact that a person spending at this level should have little worry about depleting their savings. Inglis believes this rule will not only provide enough money but will also allow a retiree’s portfolio to grow should historical returns be repeated. If returns are lower in the future, then the level of spending should still be enough to last a lifetime.

A modified version of the formula calculates the upper limit of what can be spent. Dividing one’s age by 10 gives the “no more” level of spending. Spending close to this level (e.g., 7% for someone who is age 70, or 70 ÷ 10) will cause savings to “almost certainly drop significantly over the years, especially after inflation is considered.” Inglis adds that “one should not plan to spend at that level,” with the exception of a special circumstance such as a large medical expense.

He added that common sense needs to be applied based on individual circumstances. Having a long-term care insurance policy can allow for a slightly higher spending rate. The potential loss of annuity income, such as a spouse’s pension or Social Security, will alter spending. If interest rates rise significantly, sticking with the divide-by-20 rule would make sense. An expected increase in future income (payments from a deferred annuity) or reduction in spending (e.g., paying off a mortgage) will require adjustments to future spending rates.

Source: “The ‘Feel Free’ Retirement Spending Strategy,” R. Evan Inglis, Society of Actuaries Diverse Risk: 2016 Call for Essays, April 2016.

Discussion

T Brown from CA posted over 9 years ago:

How are federal and state taxes considered under "feel free" spending level?


George Purvis from PA posted over 9 years ago:

This appears "too simple" but generally fits the 4% rule which has been a long standing and well tried standard. Retirement spending is like Rocket Science, not all that simple. As we all know, "the only thing worse than dying, is outliving your savings", and it appears a lot of people are doing that these days. I now live in a rural area of PA and continue to be amazed at the number of elderly that have little or no savings, and still have a mortgage on their house. Saving a large part of your income, at all ages, is the key to successful spending.


Norman Bunn from SC posted over 8 years ago:

Yes, you can spend more as your end date is more likely, but there is something to be said for spending more while you can enjoy it.


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