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I have seen countless articles on the 4% rule, which essentially states that withdrawing 4% annually from a retirement portfolio (adjusted for inflation) provides a high probability that funds will last for at least 30 years. Correct?
But I have never encountered a 4% article that factors in the reality that a great number of us enter a presumptive retirement of 30 years with a spouse or partner.
I assume a couple likely needs less than 2x the portfolio of a single person. But also assume the couple needs more than 1x, unless you truly believe ‘two can live as cheaply as one.’
So where is that number? 1.25x of a single person? 1.5x? 1.75x?
Like most retirement problems, there is likely no defined solution to this complex problem. You can develop a framework around questions such as how different in age are the two spouses? Is the male or female the elder spouse (or are they the same gender)? How old are you now, and what is each spouse’s life expectency. Can you adjust your plan (spending, investment profile) as the years pass and your life expectancy changes? Assuming you expect one spouse to die sooner, how long do you need to plan for the single surviving spouse? Does the surviving spouse spend as much as the late spouse?
With all the moving parts, you really have to build a plan that can withstand the unexpected as well as the expected but not realized.
The 4% rule is just a number, to use to get to what is right for you, a guide to get you thinking. I approached it differently. I said I want to have a nest egg large enough to live to be 100, and in that way I was very confident I would not run out of money. What you really need to do is calculate what you spend monthly and then build a next egg to cover that, and I used 2.5% for inflation. If that is too complicated, which in my estimation it would be for many, then the 4% rule can work as a guide to a nominal amount for your next egg and retirement, keep it simple is OK.
Certainly retirement planning is different for a couple than a single. That said, I also don’t think the 4% rule was based on single person’s portfolio but rather a pot of money for a household regardless of size. Generalized rules like the 4% rule of thumb might be useful for back of the napkin SWAGs as a starting point but retirement planning is different for every household and there are many potential variables.
I found the responses to John’s questions to be interesting and surprising in the variations of people’s interpretation of what the 4% rule of thumb means to them. For me, it’s a generalization that predicts that if you draw down 4% (or less) from your portfolio annually, it SHOULD last 30 years. It doesn’t have any bearing on what your actual household income needs would be. To that end, I created a simple Excel spreadsheet several years ago that captures all (net) dollars coming into the household and all dollars going out monthly by category. It’s not a budget per se in that we don’t set limits, but it does show our actual income needs now. And I can use it to guesstimate for the future when we might go from a couple to a single and our income sources would change dramatically through the loss of a pension thus requiring a larger draw on our investments. Interesting to us was the realization that as frugal as we thought we were, our actual “spend” was about $20k more than we thought initially. That was an eye opener!