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Ken Steiner is no fan of simple, mechanical rules for determining how much to spend in retirement. So he's developed a thinking person's alternative.

The retired actuary offers a free spreadsheet that allows retirees to adjust their spending goals every year to reflect their actual experience – including unplanned spending and unexpected market returns. You can find it here.

He hopes his actuarial approach to planning will help people move away from their fascination with the 4-per-cent rule for retirement spending, which he considers seriously flawed.

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"The 4-per-cent rule is a head-in-the-sand approach that ignores the impact of actual, emerging experience," Mr. Steiner says. "Everyone loves it because it's simple, but that simple rule becomes more and more complicated as people try to make it more realistic."

The 4-per-cent rule created a stir when it was first published exactly 20 years ago this month in the Journal of Financial Planning. Up until then, many financial planners had assumed that retirees could safely withdraw 6 per cent or more from their portfolios each year, since that was in line with what balanced portfolios had typically produced.

William Bengen, a financial planner with a background in aeronautical engineering, subjected the conventional wisdom to a real-world stress test. He looked back at 30-year periods in the past and asked what rate of withdrawal would have been safe – that is, would have ensured a person did not run out of money even in the Great Depression or the inflation-racked 1970s. He concluded that retirees should draw down no more than 4 per cent a year if they wanted to ensure their money outlasts them.

Two decades later, that rule has been enshrined as gospel, at least in popular writing about retirement. The rule, in its fuller form, says that a typical 65-year-old should withdraw 4 per cent of his initial portfolio during the first year of retirement, then adjust that amount by inflation each year.

A person who starts retirement with a $1,000,000 portfolio would therefore take out $40,000 the first year, then bump up that amount in line with inflation each subsequent year. In effect, following the 4-per-cent rule means tying yourself to an absolutely fixed amount of buying power throughout your retirement no matter how well your portfolio performs (or doesn't).

Is that realistic? Mr. Steiner points out that the rule doesn't suit those who are planning for something other than a 30-year retirement, doesn't accommodate any desire to leave a bequest, and doesn't take into account the possibility that spending will vary over the course of retirement.

Perhaps most importantly, it fails to reflect what actually happens in the market. The 4-per-cent rule is all about safety; it's intended to ensure your portfolio can endure even horrible downturns. But people who don't run into such a disaster wind up with far more money than they started with in retirement. If they stick to the 4-per-cent rule, they may live on beans in their final years when they could easily afford caviar.

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To make matters worse, the 4-per-cent rule doesn't change as you age. A 90-year-old retiree who has achieved decent returns with her investments can afford to withdraw more than 4 per cent a year simply because her life expectancy is now far less than it was when she started retirement. But the rule doesn't provide any wiggle room.

To fix the problem, several planners have suggested adding additional guidelines, but Mr. Steiner thinks most of those efforts wind up obliterating the simplicity that is the main attraction of the 4-per-cent rule. Better, he says, to start each year with a 15-minute assessment of where you stand.

That's where his spreadsheet comes in. Available for download from his website, How Much Can I Afford to Spend in Retirement, it allows you to input the amount of your savings and your expected income from pensions or annuities. It then lets you select an expected annual rate of return (he recommends a conservative 5 per cent), and choose a desired amount of savings at death. Given all that, it automatically calculates how much you can spend from your savings this year.

Mr. Steiner developed the spreadsheet during his years working as an actuary for human resource consultants Watson Wyatt in Washington. He thought it would be valuable for the growing number of retirees who no longer had defined-benefit pensions and so had to manage their own retirement spending.

To his disappointment, he failed to interest outside organizations in it, but since retiring to California four years ago, the 65-year-old has turned the spreadsheet and his blog into an unpaid hobby.

Full warning: The spreadsheet is intended for Americans and so contains some items (such as deferred annuities) that aren't of interest to most Canadians. But since it deliberately excludes U.S. Social Security, as well as other inflation-adjusted income, its portfolio calculations are just as valid here as there.

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To be sure, Mr. Steiner is an actuary, not an entertainer, and the spreadsheet and accompanying explanation sometimes reflect that. "People have told me it's too complicated," he says. But spend an hour or two with it, and you may wind up as fascinated as I am.

At the very least, it's an enlightening tool for anyone who thinks the 4-per-cent rule misses many important truths.

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