The Road to Retirement: What’s My Number?

One question we frequently hear from new clients, friends and others is “what’s my number?” or “when can I retire?” These are loaded questions as they are looking for an easy answer to how much savings should be accumulated before retirement followed by an assumed safe withdrawal rate. Our response usually starts with “it depends” as there are a number of variables which need to be considered and the solution needs to be modified over time. Each individual or family needs a dynamic rather than static strategy to manage their “number” based upon their specific circumstances.

The 4% Rule:

The 4% rule is frequently used to answer “what’s my number?” 4% is assumed to be a safe withdrawal rate in retirement. If you have saved $1,000,000 by age 65 you can draw $40,000 annually without fear of depleting your portfolio. However, there have been a number of statistical studies which factor stock market volatility over the past 20 years as well as the current low level of interest rates. The recommendation from these studies was to modify the 4% rule down to a level of 3.2% to 3.6% for a safe rate of withdrawal. However, a more thoughtful approach to planning and managing retirement is needed rather than a fixed, static percentage. First, there are a number of factors specific to the individual or family that must be considered. Second, a dynamic withdrawal strategy is best when faced with volatile markets and low interest rates.

Factors To Be Weighed:

There are dozens of factors which need to be incorporated into a retirement strategy. Each family situation is unique and considerations could include caring for other family members to children living at home beyond college graduation. The most common factors to include are:

– Retirement age including a possible second career and spouses leaving work at different ages. Thismarks the end of the accumulation

(savings) phase and the start of the decumulation (draw) phase.

– Life expectancy or longevity risk needs to be factored as people are living longer. The longer the retirement years the greater the chance of outliving your nest egg. Longevity also increases health care costs. A recent JPMorgan study noted that there is a 47% chance than at least one spouse will live to age 90 and this was a 2% increase over the prior year.

– Social Security can be relied upon for some who have reached a certain age but becomes increasingly uncertain for the younger workers. There are so many different strategies for drawing Social Security benefits that AEPG purchased software to optimize the different permutations. For a married couple, the different strategies can save over $100,000 in one’s lifetime. On balance, it is best to defer and pursue specific strategies to optimize benefits.

– Long term care and health care costs must be considered as Medicare does not cover all medical costs beyond age 65. Fidelity Investments says that a 65 year old couple retiring in 2013 will need an estimated $220,000 for uncovered medical expenses in retirement. A JPMorgan study states that at age 75 there is a 55% likelihood that men will require long-term care and 72% chance for women.

– Risk tolerance needs to be considered when constructing a portfolio to reflect an individual’s appetite for volatility. The portfolio needs to be rebalanced as retirement approaches and beyond. There is a risk of being too conservative as even after retirement there must be provisions for growth to sustain the assets for decades. Fixed income and/or annuities are used to provide cash flow and lower risk. However, current yields are\ nominal at best and a fixed income strategy is needed for upcoming economic cycle.

– Taxes at the Federal and state level must be factored in the retirement strategy. Everyone is subject to multiple taxes in retirement as well as potential estate taxes when we are “on the wrong side of the grass”. IRA, Roth and taxable accounts entail different strategies over time.

Dynamic Withdrawal Strategy

A dynamic withdrawal strategy better serves individuals than the static 4% rule. The strategy needs to reflect the above factors as well as other specific considerations for the individual or family. Market volatility and extremely low interest rates need to be considered. The dynamic strategy should establish a core withdrawal rate coupled with a higher variable rate matched with higher returns. For example, the strategy could set a 3% withdrawal rate during years where the returns range from +4% to negative returns. Portfolio returns of 5% to 10% would be paired with 5% withdraws and +10% returns would allow 6% draws. The lower core rate of withdrawals does not deplete the balance as much during periods of flat or down markets while the higher draws are paired with stronger market cycles. The dynamic strategy still needs to be periodically reassessed and address varying needs or contingencies.


Life and the financial markets are way too complicated to rely on the simplistic 4% rule. Each individual or family has specific issues that must be addressed. Modifications are required as circumstances change or evolve. “It depends” can be a lengthy response to “what’s my number?”

Important Disclosures:
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by American Economic Planning Group, Inc. (“AEPG”) will be profitable. Definitions of any indices listed herein are available upon request. Please remember to contact AEPG if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. This article is not a substitute for personalized advice from AEPG and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. Investment decisions should always be made based on the investors specific financial needs, objectives, goals, time horizon, and risk tolerance. Please remember to contact AEPG Wealth Strategies if there are any changes in your personal or financial circumstances or investment objectives as these changes may impact our previous recommendations. This information is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of AEPG. Descriptions of AEPG’s process and strategies are based on general practice and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

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