For Retirement-Portfolio Withdrawals, Your Mileage Is Likely to Vary

"The word 'planning' is emphasized because of the great uncertainties in the stock and bond markets. Midcourse corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan."

Thanks to Morningstar.com user nisiprius for sharing that quote in his comments on my column last week. It's from the so-called Trinity study, which examined the viability of various retirement-portfolio withdrawal rates given different asset allocations and time frames.

The Trinity study authors were summarizing what many of our retired readers already know: That managing one's finances in retirement doesn't lend itself well to straight-line analysis. You might retire into a good market or a weak one; you might decide that you're bored and want to go back to work or you may end up spending part of your nest egg to help grown children. Although guidelines like the 4% rule might be a starting point when gauging the viability of your retirement plan, in reality, very few retirees maintain static withdrawal rates.

Several studies have looked at how retirement-portfolio withdrawals might be adjusted upward or downward to account for market fluctuations, and that's an important area of research that I'll delve into in future articles. But retirees' changing personal situations and preferences--including the role of work and health-care considerations--might also drive varying rates of withdrawals during retirement. Of course, some scenarios can't be anticipated. But thinking through the range of possibilities--and being willing and able to adjust your own withdrawal rate upward or downward as your circumstances dictate--is a key component of creating a realistic retirement-spending plan. Below are some of the key variables to bear in mind; please feel free to use the Comments field below the article to share your own experience with in-retirement portfolio withdrawals.

Working
The role of work is an underdiscussed component of retirement planning, but earning at least some income once you've stepped away from full-time work can have a big impact on your portfolio-withdrawal rate. For example, married couples rarely hang it up on the same day, making it highly possible that a two-earner couple uses a lower withdrawal rate when just one partner retires but bumps it up to a higher level when both spouses have left the workforce.

In a similar vein, some retirees may choose to work part-time in the early part of their retirements, thereby reducing the amount of income their portfolios will need to replace during those years but calling for a higher withdrawal rate when they're fully retired. Thinking through your own attitudes toward working longer and part-time, as well as being realistic about your ability to remain employed later in life, is a key component to bear in mind when calibrating your withdrawal rate.

Social Security Start Date
If you have reason to believe longevity is on your side, delaying Social Security can be a valuable way to improve the viability of your retirement assets. If you delay receiving benefits past your normal retirement age (currently 66), up to age 70, you'll receive an 8% increase in your benefit for each year you've held off, according to retirement specialist and Morningstar contributor Mark Miller. That's a significant increase that most investments won't be able to match.

But if you're no longer earning a paycheck, delaying receipt of Social Security benefits may necessitate a higher portfolio withdrawal rate in the early-retirement years and a lower one once benefits kick in. Of course, this is a nonissue if you continue to work before filing for Social Security benefits; in that case, your benefit of delaying Social Security will be threefold: a higher Social Security benefit, continued contributions to your retirement portfolio, and delayed withdrawals from your investment portfolio.

Health-Care Costs
As with your longevity and the returns you can expect from your investments, your own health-care costs are something of a wild card when creating your retirement plan. Nonetheless, they're not likely to be static. Health-care costs are rising at a faster pace than the general inflation rate, and statistics collected by Medicare also show that health-care costs step up steadily as we age. For example, average out-of-pocket health-care costs for Medicare beneficiaries between 65 and 69 were $2,536 in 2005 but rose steadily thereafter. The typical Medicare beneficiary between 75 and 79 spent an average of $3,258 on out-of-pocket health-care costs, and that figure increased to $3,668 for those over age 85. For retirees who are required to pay out of pocket for long-term care, their retirement-portfolio withdrawals will likely increase even more dramatically. Thus, it's worth bearing in mind that health-care costs, in contrast with easy-to-estimate expenses like housing costs, are apt to vary significantly over time, and it's wise to plan for them to increase during your lifetime.

Discretionary Spending
For many retirees, the variability in health-care costs might be balanced by a decrease in discretionary spending. For example, a newly retired 65-year-old might have limited health-care expenses but his spending on travel and leisure is apt to be higher, whereas the 85-year-old with major health issues might travel and dine out less.

At the same time, be careful about assuming that your discretionary spending will automatically step down dramatically in your later years. In an interview, noted financial planner Harold Evensky commented, "While statistics demonstrate that [people spend less as they age], I think there are two problems with those statistics. One is that they're yesterday's statistics, and two, the fact that people are spending less doesn't necessarily mean they wanted to spend less. It may very well mean that they had to spend less."

Housing Costs
Yet another line item that could prompt changes in retirement-portfolio withdrawals is housing-related costs. Of course, all homeowners know that there's the potential to get hit with unanticipated home repairs, and big ones (new roofs and the like) can have a big effect on a retirees' withdrawal rates in a given year. On the flip side, retirees who downsize might be able to make due with smaller portfolio distributions than they had originally anticipated; not only will their housing costs be lower, but the proceeds from the home sale might add to the size of their nest eggs.

If you're planning retirement and intend to stay put in your current home, as you plan your retirement spending take stock of big-ticket, home-related fixes that might need to happen during your retirement years. If your retirement plans involve downsizing or changing homes, that could call for factoring in variable housing-related costs during your retirement years. 

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