Bill: Plenty of savers and investors have had it pretty good the past year or so, as the financial markets have kept chugging along despite rising inflation and interest rates. And for retirees especially, it brings up a question: How much of the wealth you’ve accumulated over a lifetime is it safe to draw down each year?
Well, a local financial expert who’s made a career advising clients on building and spending wealth says it may be more than you think. Jim Lange is back with us today. He’s president of the Lange Financial Group in Squirrel Hill, in Pittsburgh. And welcome back. It’s good to see you again.
Jim: Good to be here.
Bill: Yeah, this is a time-old question. You find you work your whole life for a nest day, and you want to make sure it lasts as long as you live. And a lot of us want to make sure we leave something for our kids or our grandkids or whatever else. And the thinking about how much it’s safe to withdraw is evolving.
Jim: It is. So, Bill Bengen was the classic writer on this. He was cited in more articles than anybody, and a lot of investors think, “Oh, okay, 30 years, 4%.” And that’s kind of ingrained in a lot of people.
Bill: Okay, so as soon as you retire, you’re 65, now you know what my nest egg is. I’m safe to take 4%. It’ll last me as long as I do. Right?
Jim: That’s right. And you don’t have to adjust, other than inflation, if the market goes up or down. It’s 4% of the initial amount. Then he comes out with a new book and says, “Hey, guess what? You can go from 4% to 4.7%, and you’re still going to be safe.”
Bill: Think of it that way, right? Oh, 4, you know, to 4.7. But, yeah, that is 17% more spending power than if you just stick with the old formula.
Jim: Right, ’cause 7.5 divided by 40, not 100.
Bill: And what’s led, then? Why the rethinking?
Jim: Well, you would think that, oh, these brilliant analytics in the market and all this stuff. And he actually just used different assumptions.
When he came out with his 4%, he said, “That’s based on 50% U.S. Treasuries and 50% U.S. stock.” And then he recently came out and said, “Nobody invests like that anymore.” You know, we have a well-diversified portfolio, and we have a little bit more stock than we have of fixed-income investments. And if you use these, let’s say, more aggressive but much more typical investment portfolios, you can spend more.
Bill: Well, what’s interesting, yeah, 60/40 is kind of now defined as moderate. It’s not 50/50 in terms of fixed end. As you say, it’s a lot more complicated than that. Now, is that true no matter what your time horizon is? It’s 4.7%?
Jim: When he came out with his initial research, he said, “This is 30 years.” Now he came out with something that might even be more valuable than the 17.5%. He said, “Well, if you only have 20 years, you get to spend more. Or if you have 10 years, depending on your life expectancy. Or maybe you retire early, or you’re interested in leaving money behind.”
And so he’s looking to time horizons that are greater than 30 years. And he came out with a chart that said, “Okay, you tell me how many years, I’ll tell you how much money you can invest as a percentage of your portfolio.”
Bill: That’s amazing. So, how does this get translated into the way you work with your clients?
Jim: Well, it’s really exciting for me because my—most of my clients are fiscally conservative, and they don’t spend anywhere near as much. And what tends to happen is they work very hard to accumulate, they spend moderately, and they continue doing that well into their retirement, and then they die with a lot of money. And that’s just not a good plan.
It’s a better plan to spend more, travel more, gift more to your kids.
Bill: Well, that’s what I’m thinking. Don’t leave it all until you’re gone, and give some stuff to the kids and the grandkids, if you can afford it, along the way. You don’t need to spend it all, right?
Jim: Yeah. Family vacations, yeah. And so I’ve been kind of pushing that anyway. And then I see this, and I go, “Oh, great. Now I have some great data to give everybody that you can spend more and be safe.”
And we heard it from not some, you know, newfangled MBA guy, but Bill Bengen, who has written—nobody’s quoted more than him on the safe withdrawal rate.
Bill: So, do you find your clients buy into it, or do they just stick with the way they’ve always done it?
Jim: I would say that they’re not jumping on board completely.
Bill: Yeah, well, I could see that. Well, we have a few seconds left, but any other big issues or opportunities you think people should be taking into account?
Jim: Well, if you really want to spend more, you can always annuitize some money in, you know, a low-cost Vanguard or something like that annuity. And that kind of guarantees you an income for your end, or your wife’s, or spouse’s life.
And the other thing is, even though I don’t think you should go out and do it, if you had some equity in your house, you shouldn’t ignore that as an opportunity to spend more. Because if push came to shove, you could either borrow against it, get a reverse mortgage, probably not sell it, but maybe at some point, if it really push came to shove, sell it. So, all these items actually increase the amount that you can safely spend.
Bill: That’s a really good point. You look at your savings and investing, and that’s your pool. That’s what you’re gonna live on. But then you do have the equity over here. You can tap it if you need it, so that has to be built into your overall plan.
Jim: I think it is, and most people don’t do that.
Bill: Fascinating. Jim Lange, always good stuff. We will have to have you back in the not-too-distant future. From Lange Financial Group, thanks so much.
Jim: Thank you.