Does the 4% rule still apply?

Life expectancy is important for the millions of people facing the tough decision about how to string out their limited savings for a retirement. Depending on where you live, you should, on average, live between 17.1 years and 23 years for a male taking a pension at 65, and between 20.7 and 27.2 years for a woman.

In Canada, the United States, Britain, Australia and France,  there is a multi-pronged approach to pensions, with the government pitching in some money, but the bulk of retirement income has to come from the individual, either through investments encouraged by the government as in Canada through Registered Retirement Savings Plans and in the US through programs such as the 401 K.

The issue for a person approaching retirement is how soon will I run out of my money (we are assuming that some money has been saved). The old formula of taking out 4% a year is not a hard and fast rule anymore. A British investment company took a look at someone who retired at age 65 with 100,000 in savings. They then looked at how long the money would last if the person took out 5%, 6% or 7%.

The results were not too surprising. The money lasted longer withdrawing 5% than it did if 7% were withdrawn. At 5% withdrawal a year the money would last over 25 years but if you withdrew 7% your money would be gone in 14 years.

Longevity is the wildcard, for many as it is unpredictable. I can, I suggest, safely assume that I as a man will live 14 more years if I continue to stay in good health but at age 71, but there are no guarantees. That is a problem when looking at how much can I afford to take out of my savings per year when I retire.

The investment company in Britain suggested that in many ways the best option for would have been to accept a lower income at first, but invest the money in equity income funds. These produce an income that, if all goes well, increases over time. The firm says that someone taking this option would have received an income of just $2,052 in the first year, growing to $4,146 over time. Just as importantly, the money would not have any risk of running out it would have grown with luck and the right market.

Annuities are not a bad option either. If I invest $100,000 in a single life level my income would be about $7,100 a year, I would receive that until I died. So, the longer I live the more I get out of the Annuity. By buying an annuity I give myself a guaranteed annual income, which may be more over time than if I kept the money in equities and withdrew 7% a year.

We do not have a crystal ball that will tell us how long we will live so we have to take our best guess based on family history, and lifestyle. Once we make our best guess then we will be able to decide how we want to take our money out of whatever saving program in which we have our retirement funds. I suggest that you will spend more and need more when you first retire than you will need when you are in your 80's (unless major healthcare is needed).