Break the 4% Retirement Rule. Here’s What Works Better.

It’s one of the most vexing questions if you’re planning to retire: How much can I afford to spend and not run out of money?

You need to know how long you’ll live to answer that precisely. The financial services industry typically assumes you’ll make it to age 95. Yet average life expectancies in the U.S. for those who make it to age 65 are about 82 for men and 85 for women. Since the vast majority of retirees won’t live to 95, some experts say people might be spending far too cautiously and not fully enjoying their retirement.

A better approach could be to customize your portfolio withdrawal rates based on individual factors. A slew of recent studies try do that—tailoring spending estimates to things like a person’s financial flexibility, health, and ownership of guaranteed-income products such as annuities.

“There isn’t just one number; the key is providing better guidance,” says David Blanchett, head of retirement research for PGIM DC Solutions and author of a recent paper on “guided spending rates.”

Much of the new research aims to go beyond a legendary guideline in retirement advice: the 4% rule. Developed decades ago by planner Bill Bengen, the idea is that retirees can withdraw 4% of their portfolio during the first year of retirement, adjust that amount for inflation every year, and have a high probability of having their money last for 30 years.

While that’s a good starting point, many experts say it can be too conservative and inflexible.

Blanchett argues for a more flexible approach. If you need your portfolio to cover essential living expenses, he says, a conservative withdrawal rate would start at 4.3% in the first year of a 30-year retirement. From there, he recommends trying to factor in your expected longevity and adjusting your withdrawals based on expectations for market performance.

If retirees don’t need their portfolio for essential expenses—covered by things like Social Security, a pension, or annuity—they can withdraw more. Retirees in a more comfortable position should be able withdraw 5.5% in the first year, he estimates, and then withdraw at a higher rate in subsequent years. People with a lower life expectancy or those who retire later in life would have a shorter projected retirement period and can start withdrawing at a higher rate.

Retirees who are sitting on a large chunk of savings when they retire may also be better off putting some of it in an annuity, rather than solely withdrawing roughly 4% every year. According to TIAA, for instance, if you have $1 million in savings and put a third of it in a lifetime income annuity from the company at age 67, you would receive $52,667 in income the first year, versus $40,000 without the annuity. That’s based on a 7.8% payout rate, which generates $7,800 in annual income per $100,000 annuitized—or $26,000, in this illustration—for the rest of your life.

Other research suggests that a retiree’s life expectancy should factor into any approach. While people aren’t great at estimating this on their own, actuarial data can help. For example, the chance of a 65-year-old with diabetes living to age 95 is less than 1%, according to HealthView Services, a retirement healthcare planning company. A 65-year-old man with diabetes can expect to make it to 79, an average, while a 65-year-old woman with diabetes would be expected to live to 82. Older adults with no chronic conditions—who represent only around 5% of the population—have a projected life expectancy at age 65 of 90 for women and 88 for men, according to HealthView Services.

Couples should consider both members’ projected longevity. A husband with a life expectancy of 79 might be tempted to claim Social Security before his maximum benefit age of 70. Yet he should consider the impact on his spouse if he dies first. Assuming he was the higher earner with a benefit of $3,000 a month at full retirement age, waiting until age 70 to claim would give his surviving spouse nearly $15,000 more a year than if he claims at his full retirement age, according to an illustration by HealthView Services.

“Survivor benefits become critically important for this,” says Ron Mastrogiovanni, CEO of HealthView Services.

Write to Elizabeth O’Brien at [email protected]