Ready to spend retirement savings? What to know about a formula for safe withdrawals

You’ve diligently saved for retirement, but how are you going to spend it?

The standard rule-of-thumb is the so-called 4% rule, a retirement withdrawal strategy that suggests retirees can safely withdraw the amount equal to 4% of their savings during the year they retire and then adjust for inflation each subsequent year for 30 years.

But it might be better to have a more tailored formula based on your health, potential lifespan and family history, some experts say. It would better ensure you're both enjoying your money and making it last through retirement, they say.

The 4% rule’s based on the traditional 60/40 (60% stock/40% bond) portfolio and aims to keep people from running out of money. However, the rule came under scrutiny after the 60/40 portfolio in 2022 had its worst year since at least 1937 as inflation soared and interest rates rose.

Even Bill Bengen, the 4% rule’s creator, has said his rule is no longer relevant. Instead, he said retirees should cut their spending and lower their withdrawal rate, The Motley Fool reported in 2022.

The problem with all this advice is that it's based on a one-size-fits-all lifespan, which can force some retirees to live too frugally and leave a lot of money on the table that they could have enjoyed, some advisers said.

The 4% rule is really “the 96% problem,” said Tim Maurer, chief advisory officer at SignatureFD in Charleston, South Carolina. “If you’re always focused on hitting the 4% number, you’re not benefitting from 96% of the portfolio to enjoy the wealth you’ve worked so hard to acquire.”

Better lifespan data can lead to longer healthspan

Since outliving retirement savings is people’s top fear, the financial industry typically assumes people will live to age 95 when designing retirement plans, But most Americans don’t live that long, according to research from HealthView Services, a provider of health-care cost projection software.

For example, for the almost 30% of the 65-plus population with diabetes, there’s less than a 1% chance they will reach 95, HealthView said. An average male client with type 2 diabetes will only live into their late 70s, while an average female with the condition will live into their early 80s, it said.

“If people had an accurate lifespan, we could actually design better financial products and allocations to that individual,” said Jay Jackson, chief executive at Abacus Life, which buys life insurance policies. “If we knew what that number was, that’s an incredibly valuable tool to use in financial planning.”

More accurate longevity data could better predict and individual's likely lifespan and healthspan, or number of healthy years, advisers said.  

How can we get better longevity data?

A person's medical and family history can provide financial advisers with information that can be used to hone a retiree's spending plan, experts said.

Jackson recalled a client who was 76 years old with a health profile that suggested he’d live an additional 8-9 years. Yet, his retirement plan was positioned using an average lifespan to age 95 or an additional 19 years.

By recalculating his distribution to match his health profile, his monthly retirement withdrawals almost doubled “while still leaving a significant amount of funds remaining to manage lifespan extension and other potential costs,” Jackson said. The extra monthly money “could be going towards more activity, more social interaction with family, access to healthier, fresh food, access to light exercise and more. All of which would create more able, healthy, enjoyable years.”

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Can every American really have a customized retirement plan?

“Yes, we can build customized plans for each person,” said Rob Burnette, investment adviser at Outlook Financial Center in Troy, Ohio.

In fact, many financial advisers said they see this as the future to help retirees find a better balance between lifespan and healthspan.

Burnette said he begins every client’s planning session by going over family history, simple questions like “are your parents and grandparents still alive, searching for genetic longevity. We also ask about health conditions, medical histories and genetics to play the odds.”

Abacus Life takes it even further using its vast database of longevity and actuarial data and technology, Jackson said. With a signed HIPAA (Health Insurance Portability and Accountability Act) release from clients, Abacus can tap your medical records, find odds on people who match your health condition and medical history and provide you with the most probable lifespan and plan around that.

People may be wary of signing over access to medical records. As an alternative, there are free online health tests you can use to get an idea of how long you might live. American Academy of Actuaries has a form with basic questions and Abacus has a more detailed tool to assess your longevity, for example.

Those are only starting points, advisers stressed. Regular meetings with an adviser, preferably in person but at least on-camera, are essential to keep a customized plan updated as you age, they said. Updates could incorporate a surprise health issue that’s arisen or steps you’ve taken to improve your health, they said.

Additonally, facial analytics can help determine someone’s biological age, Jackson said.

“We encourage you reassess every year,” Burnette said. “With technology, that should be easy.  I want to look at them. Sometimes, what people tell you over the phone don’t always line up with what you see.”

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and  subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.