You may need to cut your ‘safe shopping’ amount in half

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

Just changing the inputs is enough to make the math work.

If your savings amount is not enough and the market is not producing great returns, push the slider until you will save more or get a bigger profit. Work longer and / or spend less and the numbers add up better.

Eventually – even if the assumptions become ridiculous – you can conclude that things will be OK, even if money is tighter and life is less healthy than you expected.

Change some of their assumptions for the worse, however, and you can crush their dreams, to the point where you may have to work an extra decade or more – or die young – to be able to financially manage to live.

Now, the market and the economy are changing American assumptions. Apply some new math and the situation becomes depressing.

Prepare to be depressed, but remember that you can change your habits in the same way you change the assumptions in that calculator, making a big difference in the results.

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

That’s up just over 20% from a year ago, when US adults still thought they needed to hit the million-dollar mark to be set for life.

It comes at a time when the average American’s retirement savings has fallen by more than 10% from 2021, largely as a reflection of years of stock market woes.

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

With prices rising so fast this year, consumers are now worried that they are underestimating their savings needs.

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

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

Many retirees plan to live by the “4% rule,” withdrawing 4% of their retirement assets each year in hopes of not depleting their savings.

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

The rules themselves are rooted in a 1994 study that financial advisor William Bengen published in the Journal of Financial Planning; Bengen’s calculations show that a 50-50 stock/bond portfolio would have survived each 30-year period in the US between 1926 and 1991.

Never mind that the Center for Retirement Research at Boston College analyzed Federal Reserve data and showed that only 12% of American workers have some type of retirement account, or that the latest analysis released by the Vanguard Group of its customers shows that only 15% of retirement accounts in the largest financial companies in the world have at least $250,000 or even that this year’s market action pushed the average retirement savings below $90,000 at the same time that consumers are raising their expectations of what they need.

Those numbers only show how difficult it is for many Americans to retire.

The news is in a recently released study that shows that the 4% rule can be very wild.

The study entitled “Safe Withdrawal Rate: Evidence from a Broad Sample of Advanced Markets” – conducted by finance professors and researchers at the University of Arizona and the University of Missouri – updated the Bengen study, with some key changes, and to a great extent. different conclusions in calculating the safe withdrawal rate.

The author didn’t specify a recommended number, but said that the spending rules you choose depend on how much risk you’re willing to spend on your money.

The improvement in life expectancy – it takes money to survive – and the inclusion of returns from 38 developed countries between 1890 and 2019, meant that the researchers covered almost 2,500 years of total stock, bond and inflation data.

While the United States has outperformed almost all developed markets in the last century, there are no guarantees that last forever; performance of all markets may be important if the US suffers from any protracted regression to the mean.

With that in mind, researchers say that if you want the same possibility to save your money as Bengen calculated using only US data, the safe spending rate will be more than half, landing at 1.9%.


Spend at the 4% level, the authors say, 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 scary it is when you read, according to a Northwestern Mutual study, that people may need to save another 20%.

This is a big move from the slide assumption in any retirement calculator, enough to make almost any saver worry, especially when inflation is fixed and longevity risk and order-of-return risk (the danger of a decline just when someone retires affects the portfolio for life. ) are smacking pre-retirees in the face.

The only good news here is that this spending rule is designed to prevent draining the nest egg; You can save a little and deplete the 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 we can all make at this point is that the more money we save now, the better off we’ll be later.

Leave a Reply

Your email address will not be published. Required fields are marked *