Making a few adjustments to conventional thinking brings hope.
A couple of years back, I wrote several columns on in-retirement issues. It wasn’t a subject that I had previously considered, but time marches onward, and the topic was beginning to feel relevant.
Upon looking through the conventional wisdom, my immediate reaction was that it was too gloomy. The numbers that people carried around in the television commercials (remember them?) were overstated. Those figures assumed unrealistically high spending needs and unrealistically low withdrawal rates. To be sure, Americans were—and are—saving less than they should, but the gap between actual and best practices is less than advertised.
David Blanchett, Morningstar’s head of retirement research, has amply addressed the issue of spending needs. In his 2013 paper “Estimating the True Cost of Retirement,” Blanchett scrapped the convenient heuristic of assuming a 30-year time horizon and an 80% replacement rate for income, and he looked instead at how long people actually live, what their needs are during retirement, and how these needs change over time. His conclusion:
“While a replacement rate between 70% and 80% may be a reasonable starting place for many households, when we modeled actual spending patterns over a couple’s life expectancy, rather than a fixed 30-year period, the data shows that many retirees may need approximately 20% less in savings than the common assumptions would indicate.”
Well, that’s a nice start—particularly for this column’s relatively wealthy audience, because Blanchett’s calculated replacement rates decline for higher incomes.
Blanchett has also studied withdrawal rates, but I won’t cite him for that, because you’ll stop believing me if I use only Morningstar sources. Instead, let’s turn to Vanguard. The fund firm has issued a new white paper on the topic, with some handy-dandy calculations on appropriate withdrawal rates.
Mind you, Vanguard doesn’t bill its report as being about withdrawal rates. The paper bears the generic title of “From Assets to Income: A Goals-Based Approach to Retirement Spending.” Nor will you find any sense of victory in its findings—that perspective is all mine. Vanguard— being Vanguard—presents “just the facts, ma’am.” (If Vanguard were asked to select an ice cream flavor, it would refuse the assignment, finding vanilla to be too daring.)
But victory for investors it is.