After raising six children and working nearly 25 years at Blue Cross Blue Shield of Michigan, Elroy Grandy says he spent his first few years in retirement spending a bit too much.
"Isn't retirement something to really celebrate?" says Grandy, 65, who did graphic design work and took an early retirement buyout in 2009.
Grandy has a pension, Social Security coverage and retirement savings. But he and his wife, Kathleen, realized that they were withdrawing too much of their savings in the first few years. The Wyandotte, Mich., couple initially treated themselves to eating out more often than they would have in the past. He remembers going to an art fair and splurging on some artwork early on, too. If that went on, he said, the savings wouldn't last.
It's possible the celebration can run a bit too long, as some baby boomers soon discover. Saving for retirement is one thing; learning how to make that retirement nest egg last 25 years to 30 years or even 40 years is another.
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Once you save all that money for retirement, the big question for many baby boomers is what, really, can I afford to spend each year? How much money you need in retirement can depend on whether you have any pension or when you begin collecting Social Security.
Some consider a safe withdrawal rate to be 4 percent each year from a portfolio. But that 4 percent rule is becoming more of a subject of debate in an environment of low-interest rates and high stock market volatility.
"People should not misinterpret it. It's not any kind of guarantee," said Wade Pfau, professor of retirement income at the American College outside Philadelphia.
Pfau warned that the 4 percent is based on the assumption of a fairly aggressive portfolio, which includes stocks. The 4 percent rule would have worked during a 30-year time beginning in 1966, which included a time of high interest rates.
"No one knows what a safe rate will be because returns will depend on future events — which haven't happened and are therefore unknowable," said Marilyn Capelli Dimitroff, director of wealth management and principal at Planning Alternatives in Bloomfield Hills, Mich.
"Every situation is personal and not cookie cutter."
A key question: Is the retiree paying much attention to how much he or she is spending? Say a retiree sets up a system to spend 4 percent but then the retiree pays cash for a car, takes out extra money to pay taxes on a cottage, or takes $15,000 or more to pay for a wedding.
"It's amazing that those withdrawals don't add into the mental calculation," said James P. Studinger, owner of JPStudinger Group, a wealth-management firm in Troy, Mich.
Maybe the $50,000 in cash accounts at the beginning of a year drops to $25,000 or less at year end.
"So even though they took out a modest amount from an IRA, in reality they are spending much more than that," Studinger said.
Doug Fisher, senior vice president of Fidelity Investments, said some research is showing that a significant number of retirees are withdrawing at a rate that's higher than 4 percent of their portfolios each year. If so, many could be at greater risk of running out of savings.
Fisher says the 4 percent rule is a guideline that can help even start a conversation about how much money could be available in retirement. Fidelity offers a calculator and is working with some employers to provide more guidance on retirement readiness.
Three things can dictate how much retirees spend each year in retirement: their time-horizon, their tolerance for risk and how much of a guarantee they want that their money will last through their lifetimes, according to Colleen Jaconetti, senior investment analyst for the Vanguard Investment Strategy Group.
Someone who is going to need money for 40 years or more, she said, is at greater risk if they want to withdraw 4 percent or more in a year in retirement. But someone who retired later and needs the money for 10 years might be able to withdraw closer to 8 percent or 10 percent in a year.
Vanguard, she said, focuses on telling retirees to steer clear of thinking there is one correct withdrawal rate for everyone. The 4 percent rate takes into account a 50-50 mix of stocks and bonds; a 30-year time horizon and an 85 percent success rate that the money would last through retirement, she said.
Vanguard also has a calculator online that can help retirees determine how much to spend in retirement.
One mistake retirees can make, Jaconetti said, is to let their income from dividends and interest dictate their spending. If so, there could be a greater temptation to shift from a balanced portfolio and take on high-risk investments, such as high-yield bonds. Retirees might be better off tapping into some capital appreciation in given years, instead of taking on more risk.
Baby boomer retirees and those four or five years from retirement need to calculate how they're going to generate a paycheck in retirement. But they also need to review what they're spending and what adjustments they can make early in the game.
Grandy and his wife put a tighter control on their spending, recognizing that his mother is in her 90s now. The impulse spending had to stop for that money to last. Now, he's making extra spending money as an artist, doing work in clay and creating laser paper sculptures. The couple focuses on doing things with their nine grandchildren, soon to be 10, instead of lavishing them with gifts, too.
"We don't know how long we're going to live," Grandy said. "We don't know how long we're going to need our money. Who knows the future of anything?"