Feb. 01--Q. Very informative recent article on spending in retirement. I have a question that has confused me over the years, which I hope you can clarify. When planners advocate the 4-percent withdrawal rule, are they referring to 4 percent of your principal over and above income, or 4 percent including income? I'm 58, retired, and currently living on the income my portfolio generates, which represents about 3 percent of the total.
-- E.W.
A. Few retirement planning rules of thumb are more popular -- or more misunderstood -- than the 4 percent rule. First, remember it is just a general guideline intended to give retirees a safe withdrawal strategy that allows them to take relatively smooth retirement income over a long period of time without taking drastic cuts if the portfolio occasionally declines. It's actually an alternative -- not an addition to -- "living on income," which simply involves using dividends and bond income for expenses and not touching principal. It is also a rule designed for a 30-year time horizon, so adjust accordingly if you think you stand a reasonable chance at living longer.
In their pure form, the strategies are extremely different. The 4-percent rule is designed to create a safe withdrawal amount in year No. 1 of retirement that can be adjusted thereafter for inflation, no matter what happens in the financial markets. Living on income, by definition, means that your annual income will fluctuate substantially depending on changes in interest rates and dividend payouts, and of course still carries the risk that the portfolio will sustain big losses in market value.
On the other hand, blindly increasing withdrawals for inflation with no regard to market performance, some experts say, will result in portfolio failure in an unacceptably high number of cases -- particularly given today's gloomy outlook for future returns ... so retirement income experts have devised some added guidelines that can mitigate the risk.
Financial planner Jonathan Guyton in Edina, Minn., and professor Wade Pfau at the American College in Bryn Mawr, Pa., for example, have published studies showing that withdrawal rates can be increased if retirees are willing to cut back if markets underperform. Guyton's work, for example, found that initial spending rates can start as high as 6 percent if certain rules around cutting back in bad markets are followed.
"Most retirees tend to spend less as they age anyway and are traveling less and going out less frequently," Pfau said. "So the idea of spending a little more now while they are still healthy enough to enjoy it is certainly possible, as long as they don't get locked into a lifestyle they can't alter."
Q. I visited the Social Security office in Coconut Creek, Fla., last week to inquire about the "File Suspend" change. Your recent article stated the suspension must be filed by April 29. The office stated the date was not correct but could not give another date as they were still unsure of the date. Do you have any additional information? This information is important to my wife and I as we planned to use the file and suspend.
-- L.N.
A. The effective date for the change -- called for in the federal budget package -- is May 1, and the last business day before that date is April 29. No official guidance has been made available on the elimination of file and suspend yet, according to Social Security Administration spokeswoman Dorothy Clark.
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