They’ve been conditioned to save but should also be able to enjoy, says this advisor.

By Karen Caplan Altfest

Some years ago, a woman whom I will call Maria was brought to my office by her three adult daughters. They had called in advance to say, “Please tell our mother the money she saved is for her to enjoy.” The daughters were united on this point.

When I asked Maria what the money was for, she said, “It’s for my old age.” Maria was 91 years old at that time. After knowing her a while, I realized Maria had saved the money to give to her daughters, and, as she said, would leave “not a penny less” than the size her account had grown to at its peak.

After she died a few years later, the daughters divided her money three ways, according to Maria’s will. The “big-spender” daughter quickly depleted her inheritance. The “practical” daughter used most of her inheritance to buy a new home. The “conservative” daughter still has her inheritance in a portfolio which, like her mother, she plans to leave to younger generations.

 

When Is It Time to Let Go?

For many people, retirement is their ultimate life goal. To achieve their desired retirement lifestyle, habitual saving — beginning early and compounding regularly — is important. As financial advisors, we strive to teach our clients that lesson well. We also have told them in which tax-advantaged vehicles they should save. But we often don’t let people know that at certain times in their lives, it’s appropriate to let go, to begin to use the money they diligently put away for decades. I think some are waiting for a sign: “Now it is all right to spend,” or “You will be OK if you spend on your medical needs, your retirement costs, even sometimes on your loved ones!”

Rather than counseling clients on the freedom to spend as they age, we put a lot of time into thinking about whether retirees can safely withdraw either 3% or 4% from their portfolios in retirement.

A 25-year-old client of mine who inherited $6.5 million from her family, with more expected to come in future years, may well be able to comfortably withdraw at least 4% per annum from her portfolio when retired. Of course, her retirement is a long way off, her cost of living is undetermined, her current income may fluctuate through future jobs, and her spending must be re-evaluated repeatedly as she gets closer to her as-yet-unknown retirement date. In contrast, my 98-year-old retired client did not expect to live so long and likely will deplete his savings in three more years. Can he withdraw at the same rate as my younger client? It’s long overdue to re-evaluate what his best next steps should be.

I was on a panel years ago discussing rates of retirement-account withdrawal. In my mind, now as then, professional financial advisors need to drill down and examine the size of the portfolio, the client’s age, when retirement will commence, the client’s spending patterns, the client’s goals, the sum of the available sources of income and how the portfolio is invested. The resulting calculation and recommendations certainly should integrate all those factors.

 

Inflation May Reshape Withdrawal Rates

I’ve recently read three articles on withdrawing money for retirement that together illustrate the confusion.

The first, published by Charles Schwab, is titled “Beyond the 4% Rule. How Much Can You Spend in Retirement?”  (March 7, 2022). The 4% rule says if you have $1 million saved, for example, you could withdraw $40,000 in the first year, and adjust that for inflation, over the next 30 years. However, that doesn’t take into account the accelerating rate of inflation we are facing now, or how nervous that makes clients.

The authors, Rob Williams and Chris Kawashima, do suggest that investors don’t have to keep to a single formula. One worrying finding is that “spending decreases in retirement.” What about greater medical costs for the elderly?

Actually, I find many of my clients want to spend the same in retirement as they did when working — and sometimes more — on the theory that they have earned the right to a comfortable retirement phase. Furthermore, some clients’ ambitious bucket lists at that stage can be very costly. Schwab does factor in other assets to live on, including “Social Security, a pension, annuity income or other non-portfolio income,” but most people do not get all of these. Finally, the authors suggest that people “stay flexible” because life isn’t so predictable.

The next article I came upon was “How Much Can You Withdraw from Your Portfolio in Retirement? The Case for a 3% Drawdown.” (Feb. 6, 2022). Paula Pant, the author, suggested, “Nowadays, many think that 3% may be a better target due to lower portfolio values and inflation that has trended higher than conservative yields,” (meaning, it turned out a few pages later, that at the time of writing, “Inflation was just over 2%.”) Pant came to a popular conclusion, that “withdrawing 4% from your portfolio every year might be too aggressive a rate.” In my opinion, even better advice might be to check the economy, the portfolio and world conditions and let a professional do the calculations. And surveying these changeable factors once a year may not be often enough.

In the third article I found, CNBC reporter Greg Iacurci suggested, again, that 4% might be aggressive, but he arrives at a new withdrawal rate — 3.3%, based on a paper presented by Morningstar and written in part by Morningstar’s director of personal finance, Christine Benz, that assumed a 2.21% annual inflation rate. Published on Nov. 11, 2021, this now seems like a low rate, at least for the next few years. The suggested 3.3% withdrawal rate sounds like a direct compromise between 3% and 4%. Benz votes for making “some simple tweaks,” but she warns there are tradeoffs to being flexible.

Chiefly, she suggests that making these annual adjustments to spending might mean significant savings but a lower standard of living from year to year.

 

Keep Re-Evaluating Clients’ Withdrawal Rates

I’ve come to wonder: Should there be different withdrawal rates during one’s retirement period?

When I evaluate retirement withdrawals, I first ask my clients, “What is your desired cost of living?” Then I assess whether that will work for the client until well into their 90s. And if it won’t work, I have other suggestions, dreaded “belt-tightening” moves among them.

To me, it seems odd to begin with either 3% or 4% for everyone. Articles written even months ago seem outdated by the recent rise in inflation. And whose crystal ball can say how long that will last? I prefer to know what the client wants to achieve and then, after a careful analysis, to see whether that is possible. If it is not attainable, I give them a more realistic choice.

When advising clients on retirement, financial advisors should consider the following ideas and use them as a guide.

 

Tips for the Financial Planner

• Wait: First hear the client’s story. That’s what makes the wheels turn in our work. One financial problem could have many solutions, depending on the client’s current money situation.
• Note: Before giving your wise advice, take in how the client approaches his or her overall financial life, goals and desires. Then give them suggestions they can follow.
• Research: What can your clients do at any age in their lives to achieve these goals?
• Update: Finally, check in with them every year or two to see what’s working, what’s not and what needs to be put front and center.

 

Tips for Your Clients

• Determine: How will you live in retirement? Will you downsize, move to be near family or move to a lower-tax state? Will you work part-time for a few years?
• Plan: Prepare for emergencies that you may not foresee. One of my clients was in a car accident that cost him much of his non-retirement savings in a lawsuit. It’s good to set aside some rainy- day money, contribute to retirement accounts and have more than one source of cash flow for your retirement years.
• Diversify: Allocate your portfolio, your assets and your plans wisely. For the client in the car accident, it turned out having various assets in different types of accounts helped.
• Learn: Embrace financial literacy. I have so much fun teaching this to people who don’t know what they don’t know. Closer to home, learn who your financial team is, where your assets are and how your partner or spouse arrives at financial decisions.
• Acknowledge: Know when you need help and ask for it. Your primary goal should be to find the best professionals to help you.

As advisors, we can have great influence on our clients. We have come this far by telling clients how important it is to save, ideally from a young age; now let’s do more. Let’s teach our clients when it’s ok to spend in retirement, and get them to the finish line, which, after all, is the end of their retirement period, not the beginning.

 

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Karen Caplan Altfest, PhD, CFP, is a principal advisor at Altfest Personal Wealth Management. She helps many of the firm’s clients with a variety of investment and financial planning issues and specializes in helping women clients and widows. Karen’s Financially Savvy Woman programs, including the Women’s Financial $pa, are popular with clients. Her focus is to educate and empower women.

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