Now, Let’s Talk About What You Really Can Spend in Retirement

Last week I wrote a piece about what current research shows people typically spend in retirement. Most people spend far less than they could. Over a 30-year period, people with a net worth of $560,000 or more could typically spend over $1 million more than they do and still never run out of money. I discussed several factors as to why this occurs, but the most important is simply not being educated on what a safe withdrawal rate looks like.

William P. Bengen is one of the fathers of safe withdrawal rates. His research over 20 years ago established what many call the “4% Rule” which in reality was the 4.15% rule– it just got rounded down to make it easier to remember. The purpose of the “4% Rule” was to establish a safe annual withdrawal rate that would assure retirees that they would never run out of money. Bengen tested 400 retirees (1926-1976) and found that the absolute worst performing retirement portfolio (for the person who retired in 1968) still lasted over 30 years using an initial 4.15% withdrawal rate.

Here’s the details of how it worked:

1. Add up all of your retirement accounts and then multiply the total by .0415 (4.15%) and that gives you the safe withdrawal amount for year 1 of retirement.
2. In subsequent years (Years 2-30, assuming a 30-year retirement) simply increase the dollar amount you withdraw each subsequent year by the inflation rate. For example: a $1 million investment portfolio would have a safe withdrawal amount in year 1 of $41,500. ($1 million x .0415). In year 2, assuming a 2.5% inflation rate, the safe withdrawal amount would be $42,538 ($41,500×1.025). In year 3, assuming a 2.75% inflation rate, the safe withdrawal amount would be $43,708 ($42,538 x 1.0275). Each year thereafter you check the annual inflation rate and apply the same formula.
3. For the original rule, Bengen relied upon an asset allocation of 60% stocks and 40% bonds, and only used two asset classes: “US Large-Company Stocks” and US Treasury Bonds.

I just finished Bengen’s new book A Richer Retirement, Supercharging the 4% Rule to Spend More and Enjoy More wherein Bill shows his new findings primarily based on the expansion of asset classes. He revisited safe withdrawal rates using equal investments in 5 equity classes: US Large Cap, US Small Cap, US Mid Cap, US Micro Cap and International stocks. For bonds, he used 5% US Treasury Bills and 40% Intermediate Government Bond Funds. Overall, he primarily tested an asset allocation of 55% stocks, 40% bonds and 5% cash.

The result of using a much more diversified portfolio and then retesting the withdrawal rates over 30 years is a new safe withdrawal rate (now called SAFEMAX) of 4.7%. There’s no change in the formula set forth above; just start with 4.7% instead of 4.15%. While that is a great starting point to see if you are on track to retire, you should also be aware of the following:

1. No one, not even William P. Bengen, can guarantee that what has worked in the past will continue to work in the future.
2. The SAFEMAX of 4.7% is based upon the absolute worst investing environment he tested. Most of the retiree time periods allowed for a greater “safe” withdrawal rate and the average SAFEMAX for all retirees studied was 7.1%. On average, even with the 4.7% withdrawal rate the average retiree will die still having about 5 times what they started with.
3. While not 100% guaranteed under the research a 5.25% withdrawal rate had a 95.7% success rate.
4. The SAFEMAX withdrawal rate does not factor in leaving a legacy to heirs or charities. Decrease the withdrawal slightly to do that.
5. Bengen’s website offers updates even to his recent book. On September 18, 2025, he updated the research to now recommend an allocation of 65% stocks, 30% bonds and 5% cash for higher upside potential.

As I mentioned last week, life was so much easier for retirees when they could just add up their guaranteed income from pensions and Social Security to figure out how much they could spend each month. Times have changed and now with large defined contribution plans like 401(k)s and 403(b)s, retirees must find a way to create their own “pension” to be added to their guaranteed income like Social Security.

The 4.7% rule is a good starting point. Figure out what your expected monthly expenses will be and then subtract Social Security and any pension income. Whatever you have left is what you are going to have to cover with your retirement nest egg and now you can apply the 4.7% rule to see where you stand.

Fun Fact: Michigan’s only bear is the black bear, which has a lifespan of about 10 years. Male black bears live in an area of about 100 square miles, females live in a 10-20 mile area. There are about 12,000 black bears in Michigan and the number is increasing annually. A male black bear can reach 500 lbs.

In Retirement: What You Can Spend vs. What You Will Spend

Most people spend all of their working lives saving and investing so they have a nice nest egg to withdraw from once their working days end. I’ll put together a synopsis on what you can safely withdraw in retirement in a future Up Early, but not until I finish the new book by Bill Bengen who originated the “4% rule” 20 years ago.

For now, let’s look at some interesting research on how much retirees feel comfortable withdrawing from their investments during retirement (i.e. what you will likely spend).  The findings might surprise you.

In December 2024, David Blanchett and Michael S. Finke published a paper entitled “Retirees Spend Lifetime Income, Not Savings”. Their findings are that retirees spend less than what was originally predicted, and likely, less than their parents. That makes sense for two reasons:

1. Earlier generations of workers had what are called defined benefit plans. Those are your good old-fashioned traditional pensions which are nearly extinct except for government employees at the federal and state levels. Under the traditional pension, the retiree knew exactly how much their monthly income would be and could spend 100% of it comfortably knowing that next month the same check would arrive again. Today’s workers rely on defined contribution plans, primarily consisting of 403(b)s, 401(k)s and IRAs. Under these current plans, there is no monthly check in retirement, and the retiree has to decide how much to withdraw from their accumulated retirement savings.
2. There are many unknowns that retirees must grapple with these days, including their lifespan, future Social Security earnings and stock market volatility. Those unknowns, combined with the lack of a set amount in a monthly check from a traditional pension all lead to the same result: retirees spend less than they could in retirement because of both fear of running out of money and lack of knowledge on safe withdrawal rates.

Blanchett and Finke’s article summarized the statistics supporting that finding as follows:

1. Retirees spend only around 50% of their savings over their lifetime.
2. Married 65-year-olds with at least $100,000 in assets typically withdraw just 2.1% per year from qualified and non-qualified investment accounts.
3. Over a 30-year period, retirees in the top 20% of net worth (currently approximately $560,000) could spend over $1 million more than they do and not come close to running out of money.

These findings are no surprise to me from my experience as a financial planner and also as a personal investor. It is very hard psychologically to shift from saving and investing to what’s called the “the decumulation phase” when you need to start liquidating investments and begin systematic withdrawals. For most people, this is why professional help is a must in retirement.

A good financial planner can give you confidence in many ways, including in your ability to safely withdraw more than you probably would otherwise take from your investments. That doesn’t mean that you must increase spending on “things”, but perhaps for example, it would allow you to make lifetime gifts to watch the enjoyment it brings to family members and yourself rather than waiting until your demise. Alternatively, getting a warm appreciative letter from a charity for a donation is a great feel-good moment. Perhaps a family trip to a special place is really within your budget!

Fun Fact: Did you ever wonder at what age people are the happiest? German and Swiss researchers studied over 460,000 people around the world and found age 70 to be the happiest age. I’ve seen other studies that differed from that finding. One had age 23 and a study at Harvard found 35 to be the happiest age. For me, I will keep abiding by the words of Jonathan Swift: “No wise man ever wished to be younger.” – Experience is the best teacher!

Understanding Personal Loans

One of my sons is going back to school full-time this month to get his MBA. While he did get a scholarship, it wasn’t for the full amount of tuition so…I put on my “Bank of Mom and Dad” hat and offered to help with a personal loan for the next two years of tuition. Borrowing from or loaning to family members can be complicated. Here are some rules and recommendations:

1. Most personal loans are “unsecured” which means all I’m relying on from my son is his promise to pay me back. If I said “I want the title to your car so that if you don’t pay I can sell it for what’s owed”, then we would have a loan “secured” by his automobile. If the security for a loan is real estate, then the loan is typically called a mortgage.
2. I’m going to write out the loan terms in a document that is called a “promissory note.” That’s just a personal loan written out and signed by the parties with a promise to repay. You can agree to some collateral in a promissory note, but it usually is unsecured.
3. Writing out the loan terms does several helpful things: 1. Memorializing the obligation helps to strengthen the obligation. Signing the document fortifies the seriousness of the commitment. 2. Memories can fade about the terms of the loan as years pass. The writing sets forth the exact terms and conditions from the start for future reference.
4. Loans and gifts are closely related, especially within families. Because there are limits on how much you can gift tax-free each year ($19,000 per person in 2025), the IRS is well aware that some folks try to use a “loan” to get around those limits. As a result, the IRS requires you to charge a minimum interest rate on the loan to show it’s legit. The minimum rate is called the Applicable Federal Rate (AFR) and can be found online. Determining the minimum rate depends on the length of the loan and how frequently you will be compounding the interest rate. My son’s loan will be a 10-year loan (he should be on sound financial ground by then), so currently I must charge him 4% interest under the IRS AFR tables.
5. Michigan, like most states, limits the amount of interest that can be charged on a loan. Laws limiting interest rates are called usury laws and in Michigan the limit is 25% annually. Unfortunately, there are lots of ways businesses can get around that limit and charge a higher rate, but you should stay within that boundary on any type of personal loan.

Now, despite being a lawyer I don’t have a heart of pure stone (close, but not pure). I may very well forgive the loan over the years and as long as I stay within the applicable gift tax exclusion, then there are no tax consequences. Heck, I even made him link one of my bank accounts to his university because if I pay the tuition directly then the $19,000 gift tax exclusion limit does not apply. I left all of my options open, and I told him I’m expecting first class treatment when I can’t get out of my rocking chair anymore. Things seemed so much easier when the only issue was what type of pizza to get for his soccer party sleep over. I guess I need to remind myself of something I tell clients all the time: Figuring out the best way to help out with tuition for an advanced degree for my son is a “good problem to have.”

Fun Fact: I was watching the Lions game this weekend with one of my sons and I complained about all of the downtime (mostly filled with commercials), so I looked it up: There are about 18 minutes of actual live gameplay during the typical NFL game that airs for over 3 hours from start to finish. I prefer to tape the games and run through all the downtime, and both of my sons remind me that’s proof of my old age (LOL).