Do You Experience Fear of Running Out (FORO)?

Examining "safe" withdrawal rates and other retirement variables

Photo by Getty Images for Unsplash+

When I first began this newsletter, I made a conscious decision not to write about finances, and after researching this piece, I am remembering why. In brief, I am somewhat math-impaired.

But I was curious about some rumblings online, questioning the conventional wisdom about how much retirees could safely spend down from their retirement savings annually. For years, that safe rate has been pegged at 4%. Was that number still a good one? I plunged into two 12-page white papers by different analysts, as well as numerous articles in the financial press, trying to answer one basic question: Will I run out of money before I die?

One reason I have avoided financial articles for so long is that I am not adept at complex calculations. A compelling attraction of majoring in journalism was the absence of a college math requirement. I say this to emphasize that I have no idea how the investment wizards came up with the 4% figure, and no amount of tutoring will help me understand it, so I can’t verify whether it was based on algorithms or fairy dust.

What I do know is that last month Christine Benz, Morningstar’s director of personal finance and retirement planning, reported that in 2025 the safe withdrawal rate is down to 3.7%. The difference is “capital market assumptions.” Translated into common parlance, the wizards now assume a lower rate of return on investments over the next 30 years.

Monte Carlo?

But my confidence in that projection took a hit when Benz explained that it was based on “Monte Carlo simulations.” What? Are the wizards trying to suggest that investments in stocks and bonds are as risky as bets in a gambling casino? With further study, I learned that a Monte Carlo simulation is “a way to model the probability of difference outcomes in a process that cannot easily be predicted due to the intervention of random variables.” Translation: After running through all the possible variables, the wizards choose the most probable outcome. Given that random variables can include anything from wars to earthquakes to environmental calamity, I found that reassuring.

So what is safe? All my research has led me to a clear and inescapable conclusion, which I am happy to share: It depends.

It depends on the size of your nest egg. It depends on how long you live. It depends on how much you spend annually. It depends on whether the stock market performs as well as you hope for over the next 20 to 30 years. It depends on your health, and on whether you have long-term care insurance.

Keeping in mind my mathematical limitations, it appears to me that if your retirement savings is greater than $2million, you’ll probably be just fine no matter what. (Of course, there are exceptions. Actor Jim Carrey, who earned many millions more in his film career, returned from retirement because, he said, “I bought a lot of stuff, and I need the money, frankly.” Standard of living matters too.)

More Variables

If you have less than $2million stashed away, a safe withdrawal rate comes down to four variables:

• Your retirement savings. For what it’s worth, the average American, aged 55 to 64, has retirement savings of $537,560, according to the Federal Reserve. Between ages 65 and 64, the average is $609,230.
  
  How fast you spend. Hollywood hotshots aside, most of us live somewhere between Enough to Squeak By and The Life To Which We Wish We Could Grow Accustomed. Figure out where you fall on that spectrum and what you spend in a typical year.

• How much other income you have. Include Social Security, as well as part-time earnings.

• How long you plan to live. With longer lives projected for many of us, a 30-year span from ages 65 to 95 is typical for calculations.

Here’s an example of how the variables play out, at least in journalist-level math:

Let’s say your nest egg is $600,000, your Social Security check is the average $1,976 per month ($23,712 per year), and you spend $100,000 per year. A 4% withdrawal from savings nets you $24,000 (or $22,200 at 3.7%). Your income, Social Security and a 4% withdrawal, add up to only $47,712, leaving you $52,288 short of your expenses. You do your own math, but it seems to me that if you close the spending gap from your retirement funds, you’ll drain your savings in about 14 years.

If you want to enjoy more years of financial security, you would need to

• Increase income by working longer, and/or

• Cut back on your living expenses, and/or

• Sell off assets (i.e., home) to enlarge your savings.

(Not recommended: The Monte Carlo option. Do not lean on your Vegas nerve. Remember that the house always wins.)

Things look more promising when the savings reach $1.5 million. A 4% withdrawal is $60,000. With the same Social Security income, you would be looking at $83,712 to live on, and with a modest cutback in living expenses that could be sustainable for the duration.

But don’t take my word for it – consider the source. Get expert advice from a certified financial planner, who gets paid to understand this stuff.