The answer to how much a retiree can reasonably spend per year is unique for each individual, says Research Fellow Luke Delorme.
The American Institute for Economic Research has created a new retirement withdrawal calculator that lets retirees consider several important factors that will affect how much they should spend each year. For example, it takes into account retirement age, the level of risk that the retiree will outlive his money, and how much of the retiree’s savings to invest in stocks. The calculator is accompanied by Delorme’s research report, “How to Formulate a Retirement Spending Plan.”
Delorme suggests factors retirees should consider:
- Know that luck plays a big part in how much there is to spend. Retirees can’t control stock market performance during their investment period, and “chasing returns” can hurt them.
- The best way to make sure a retiree doesn’t run out of money is to restrain spending. But that could also mean the retiree will die with a good deal of unspent money. Consider the retiree’s appetite for risk in deciding how much to spend per year.
- Another consideration is whether to withdraw a specific amount of money each year, or whether the retiree has the flexibility to adjust based on stock market performance that year.
- How long will the retiree need his retirement savings to last? That depends on several questions: How long does the retiree plan to work? What is the estimated life expectancy, based on health and gender and marital status? Single men, for instance, have a shorter life expectancy than a woman or a married man.
- If the retiree has guaranteed retirement income from pensions, annuities and Social Security, he or she will have the flexibility to take more risks with investments, and perhaps withdraw more per year.
- If the retiree pays higher investment management fees or wants to leave more money to heirs, reduce withdrawals.
The retirement withdrawal calculator is at https://www.aier.org/retirement-withdrawal-calculator.