Q&A: Charles Schwab’s Stephen Johnson offers his perspective on the retirement spending survey

Why do you think many people fail to effectively plan for the transition to retirement spending?

“The disconnect is coming from market performance. Because the market has been flat the past 10 years, and experienced some incredible swings with the financial crisis, people have become apathetic. They’re not focused on what they invest in, or are not investing at all. Because of market performance, people are resigning themselves to working more than originally planned.

“People are very nervous about investing in the stock market now. People want to preserve what they have, [and have a] tendency to become overly conservative. They don’t want to do anything with investments for fear of making the wrong decision.”

What are the biggest misconceptions people have about planning for retirement spending?

“People tend to be way off on both extremes [on the amount they’ll need to spend]. There are a lot who feel they will need more money than what they were generating during their working years. Some folks totally underestimate their expenses in retirement.

“People tend to have in their plan a heightened return estimate, even knowing what we know now. People still believe an 8 or 9 percent a year [return] is doable. That may be overly aggressive at this point. A reasonable return is in the 4% to 6% range, depending on the type of portfolio you have.

“We suggest a 4 percent withdrawal rule. If you decide that in retirement you need to spend $40,000 a year – we suggest a portfolio of approximately $1 million. [At that level,] you could confidently take out 4 percent of your portfolio and could feel comfortable that you could maintain your standard of living and keep pace with inflation for a retirement lasting 30 years.”

When should people start thinking about retirement spending? What questions should they be asking?

“We think the earlier, the better. In your 30s, 40s… [Definitely] 5 to 10 years prior to retirement, develop a plan. That plan should include:

• How much have you earmarked for retirement?
• Where are you keeping it?
• What will be your needs for income?
• How much are you spending?
• Where are interest rates?

“We are working with our clients to have a comprehensive plan for where it will come from, and how they will rebalance their portfolio the closer they get to retirement.

“It’s an absolute tragedy that interest rates are so low. The big thing of that whole financial crisis that was overlooked: Retirees are now pressured by interest rates that are at all-time lows. It’s really impacting a great deal of people, especially people retiring in the last two years – or in the next two years.

“It’s forced people to change lifestyles. They’re not able to generate as much income. A family that had invested in CDs or treasuries now has to go out on the risk spectrum a bit and invest in lesser-quality corporate bonds or dividend-paying stocks. They’re taking on more risk than what they had been accustomed to.”