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Read More: Funding Shortfalls Put Pensions in Peril
In the past, financial professionals used to talk about a 4 percent drawdown as a good rule of thumb for retirement. But that approach is no longer so apt, said David John, senior strategic policy advisor at the AARP Public Policy Institute. It's not safe anymore to assume that your investments will earn what that 4 percent rule was based on. Given current rates of return, the 4 percent rule "gives you a 15 to 30 percent chance that you will run out of money," he said.
The 4 percent rule "gives you a 15 to 30 percent chance that you will run out of money."
But determining how much to draw down isn't easy. Unlike savings calculators, which many financial firms offer online to help investors determine what they need to put away, tools for calculating retirement spending are rare. "When it comes down to retirement income, you can find annuity calculators, but you really can't find anything that's more complex," said John.
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Yet another challenge for retirees is the prospect that they may have to make complicated financial decisions on their own later in life, when their cognition is declining.Studies (PDF) have shown that even a moderate decline in cognition can have an outsized effect on financial decision-making ability.
"You don't want to reach a time where you have been retired for 20 years and now find you have some incredibly difficult decisions to make," said John. "This is something that is best handled to the extent that you can as close to retirement as possible."
There are some changes underway. The White House has proposed requiring all investment advisors to abide by a "fiduciary" standard,acting in the best interest of clients and not just offering choices that are suitable. (In a white paper released this week, the financial industry argues that brokers are already "thoroughly" regulated and that existing investor protections "prohibit recommendations of investments at unfair or unreasonable prices.")
There are also new rules aimed at encouraging the use of deferred annuities in retirement, so that investors can make sure they have some income in their last years.
Still, the problem of how to draw down savings remains—and becomes most immediate at a vulnerable time in investors' lives."The group getting the most protection are the middle-aged workers. We've got this exactly wrong," said David Laibson, a professor of economics at Harvard who has studied decision-making over the life cycle. "It should be that the most vulnerable population is getting a helping hand."