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Your Funds: You might have to cut you ‘safe spending’ number in half

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Play around with an online retirement calculator long enough and it won’t take long to find the perfect scenario that lets you live out all your financial dreams.

Just change the inputs enough to make the math work.

If your amount of savings is insufficient and the market isn’t delivering ample returns, push the sliders around assuming you’ll someday save more or get bigger gains. Work longer and/or spend less and the numbers add up better.

Eventually — even if the assumptions get silly — you can conclude that things will be OK , even if money is tighter and life is less cushy than you hoped.

Change a few of those assumptions for the worse, however, and you can crush those dreams, to the point where you may have to work an extra decade or more — or die young — to be financially set for life.

Right now, the market and economy are changing Americans’ assumptions. Apply some new math and the situation gets downright depressing.

Prepare to be depressed, but keep in mind that you can change habits the same way you change assumptions on those calculators, making a huge difference in the outcome.

The most recent release of results from Northwestern Mutual’s 2022 Planning and Progress Study showed that American adults now believe they will need $1.25 million to retire comfortably.

That’s up just over 20 percent from a year ago, when U.S. adults still figured they needed to reach the million-dollar mark to be set for life.

It comes at a time when the average American’s retirement savings has dropped by more than 10 percent from 2021, mostly as a reflection of the stock market’s year-long misery.

There is no perfect formula giving people “the number,” but an imperfect rule-of-thumb that many savers follow is that a nest egg should generate 70% of your pre-retirement income every year in retirement.

With prices rising so rapidly this year, consumers are now worrying that they have underestimated their savings needs.

Christian Mitchell, chief customer officer at Northwestern Mutual, said this week on my podcast “Money Life with Chuck Jaffe” that inflation and market volatility are driving their increased expectations, “but the bigger piece here is that people’s anxiety about their money is just increasing. They don’t know exactly how much they need to save, the world has become a more polarized and more volatile place, and so they are just massively increasing their savings expectations.”

The real issue, however, may be their spending assumptions.

Many retirees plan on living by “the 4 percent rule,” withdrawing 4 percent of retirement assets annually in hopes of not outliving their savings.

Under the 4% rule, a $1 million 401(k) would allow you to spend an inflation-adjusted $40,000 each year in retirement with minimal odds of outliving your money.

The rule itself is rooted in a 1994 study that financial adviser William Bengen published in the Journal of Financial Planning; Bengen’s calculations showed that a 50-50 stock/bond portfolio would have survived every 30-year period in the U.S. between 1926 and 1991.

Never mind that the Center for Retirement Research at Boston College analyzed Federal Reserve data and showed that just 12% of American workers have any sort of retirement account, or that the most recent analysis that Vanguard Group released about its own customers showed that only 15% of the retirement accounts at the world’s largest financial company have at least $250,000 or even that this year’s market action pushed average retirement savings below $90,000 at the same time consumers were raising their expectations of what they need.

Those numbers just show how hard it may be for a lot of Americans to retire.

The news is in a recently released research showing that the 4% rule may be wildly off base.

A study titled “The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets” — conducted by finance professors and researchers at the University of Arizona and the University of Missouri — updated Bengen’s study, with a few key changes, and came to very different conclusions on calculating a safe withdrawal rate.

The authors didn’t divine one recommended number, but instead said that the spending rule you choose is dependent on how much risk of outliving your money you are willing to accept.

Improvements in life expectancy — requiring money to last longer — and the inclusion of returns from 38 developed countries between 1890 and 2019, meant that the researchers covered nearly 2,500 total years of stock, bond, and inflation data.

While the United States has outperformed virtually all developed markets over the last century, there’s no guarantee that lasts forever; the market experience of all markets could be important if the U.S. suffers from any protracted regression to the mean.

With that in mind, the researchers did say that if you wanted the same probability of outliving your money as Bengen calculated using U.S.-only data, the safe-spending level would be more than cut in half, landing at 1.9%. Ouch.

Spend at the 4% level, the authors said, and your risk of “financial ruin” is dramatically higher.

Generating the same amount of income to spend safely would require more than twice the savings.

Consider how frightening it was when you read, per the Northwestern Mutual study, that people thought they’d need to save 20% more.

It’s a massive movement of the assumption sliders on any retirement calculator, enough to make nearly all savers uneasy, particularly as inflation lingers and longevity risk and sequence-of-return risk (the danger of a downturn right as someone retires impacting a portfolio for life) are smacking pre-retirees in the face.

The only good news here is that these spending rules are designed to avoid draining a nest egg; you can save less and deplete savings gradually without becoming destitute or dying completely broke.

Just don’t expect to have your cake and eat it too; the only safe retirement-savings assumption that all of us can make in these times is that the more money we save now, the better off we will be later.

Chuck Jaffe is a nationally syndicated financial columnist and the host of “Money Life with Chuck Jaffe.” You can reach him at and tune in at


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