The 4 percent rule, which says most retirees can safely spend 4 percent of their retirement savings annually and not run out of money, has been under a lot of scrutiny lately for a variety of good reasons, including the obvious: Interest rates are lousy.
Roger Nusbaum, who is an Arizona-based financial adviser and chief of his local volunteer fire department, reduces the rule to very simple retirement planning math. If you have saved $1 million, you can confidently take out $30,000 to $50,000 a year for as long as you live. But if you feel compelled to spend $80,000 to $100,000, there's a big likelihood your money is going to run out while you still need it.
Merrill Lynch goes a step further in a white paper written by Anil Suri, head of investment analytics at Merrill Lynch Global Wealth Management. Suri says the problem with the 4 percent rule is the "flaw of average." The retirement planning problem most of us face is that we aren't average. So Suri and Merrill have devised a way for retirees to figure out more precisely how much of their savings they can spend.
Merrill's plan starts by saying the amount you spend is related to the how you allocate your money. The more you are willing to put into equities, the more you may be able to spend. "Clients wishing to maximize how much they can spend should allocate roughly 40 percent to equities," Suri's white paper says.
In Merrill's scheme, you can become more cautious as you age. For example, someone spending at a modest 3 percent rate should allocate about 30 percent to equities while in their 60s, but when they reach their 70s, they could reduce that allocation to 20 percent. Take a look at this chart for some guidance.
Once you've selected your equity investment rate, then Merrill offers another chart to help you determine what percentage of your savings you can safely spend. If you feel comfortable with an 80 percent chance you won't outlive your money, you can spend more than if you demand a 95-plus percent chance of leaving behind at least some money when you die.
Suri and Merrill don't believe this is the only strategy, but if you are looking for a formula that is understandable and applicable at most savings levels, this is a good place to start.
Here are the key charts: