Managing the unknown and unknowable in retirement is the biggest challenge and makes choosing an income strategy perplexing.

Wade Pfau, professor of retirement income at The American College, says low interest rates and low returns on fixed-income investments makes this a particularly difficult time to retire. On his Retirement Researcher website, he points out that someone who retired at age 65 in 2000 after saving 15 percent of his salary for 30 years would have been able to replace more than 100 percent of his income through relatively safe investments. Today, that same 65-year-old can only expect to safely replace less than 40 percent of income. If this person’s only other source of retirement income is Social Security, he will have a difficult time achieving the goal of 85 percent of pre-retirement income that many experts recommend.

So what is reality? This table created by Pfau offers a narrow array of percentages that a couple conservatively, moderately and aggressively invested can initially safely spend from their retirement savings with limited risk of running out of money. You can multiply the percentages in the chart by your own savings totals to get a rough idea of the income your nest egg would produce. As you can see, none of the percentages give you a lot of wiggle room. The highest spending rate is a fixed percentage to be withdrawn at the beginning of each year with no annual adjustment for inflation. While that might sound risky and unrealistic, Pfau says, “You can spend more today if you are going to spend less tomorrow — some people think that is likely as you age.”

How much can you safely withdraw from retirement portfolio?

Spending strategy Conservative Moderate Aggressive
Fixed amount for 30 years 4.09% 4.44% 5.19%
Spending with 2% COLA 3.13% 3.44% 4.09%
Inflation-adjusted spending 2.35% 2.88% 3.51%

The chart shows sustainable spending with systematic withdrawal strategies from an investment portfolio over 30 years. The figures assume the conservative couple uses a 25% stock allocation and seeks a 95% chance that the portfolio will not be depleted within 30 years. The moderate couple uses a 50% stock allocation, seeking a 90% chance for portfolio success. The aggressive couple uses a 75% stock allocation, seeking an 80% chance of success. Analysis assumes withdrawals are made at the start of each year, a 0.5% portfolio administrative fee is deducted at the end of each year, and that market returns reflect capital market assumptions calculated by Wade Pfau.

Source: Wade Pfau,

The numbers in the 2 percent COLA column reveal the starting point in the first year. From there a couple can increase the amount withdrawn by 2 percent a year. Similarly, the numbers in the inflation-adjusted spending column show the amount that can be withdrawn in year one, after which amounts can increase based on the Consumer Price Index.

Another thing worth noting is that Pfau says none of these strategies is carved in stone. If your economic situation improves, you may hit mid-retirement and be able to revise upward, especially if you start with a conservative strategy. But beware: If you spend too much in the beginning, you probably won’t be able to recover.

If you have an old-fashioned pension or you are willing to spend on fixed-income annuities, that, along with Social Security, may cover your necessary expenses. In that case, Pfau suggests that you might consider investing less conservatively — putting more of your assets in the more volatile stock market. Even so, he is cautious. “The reality for today’s retirees is that interest rates are very low and stock market valuations are high. The returns experienced in early retirement will weigh disproportionately on the final outcome.”

If you are working with an adviser — and Pfau thinks you should be if this is your situation — he urges you to be skeptical about any suggestion by that person that he or she can help you do lots better. “Some advisers use calculators based on historic data. They plug in your numbers and get 6 percent returns. That is just not realistic,” Pfau says.

Be especially cautious about hiring an adviser who says something like: “That last guy who said you could only spend $50,000 a year is stupid. Let me manage  your money. If I manage your money, you can spend $100,000. …  People want to go with the guy who makes the best promises,” Pfau says. “Reality doesn’t set in until it’s too late to do anything about it.

“My point is not that people should avoid retirement,” says Pfau. “It’s a reality check about the conservatism necessary for any type of retirement income strategy today.”

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