Our spending desires (and needs) change through time. Blanchett observes a “retirement spending smile” that varies slightly for retirees with different household spending levels.
This article is part of a series; click here to read Part 1. Using the portfolio return and volatility assumptions determined in Exhibit 1.1, we then reverse engineer fixed return assumptions and sustainable spending levels for a desired retirement time horizon and targeted probability of success. The investment portfolio is modeled using 100,000 Monte Carlo […]
There has been too much emphasis on the portfolio and spending conservatively to keep failure rates low. This is not the whole story for retirement income. Certain circumstances, which we will explore, may allow retirees to accept a higher probability of “failure,” and spend more aggressively from their investment portfolio.
The relationship between how long you’ll live and your sustainable spending rate is a big piece of the retirement planning puzzle.
One way to deal with the uncertainty of how long you’ll live when you plan for retirement is to look at survival probabilities.
Of all of the different goal types, longevity goals are probably the least intuitive. Your longevity goals are based around the possibility that you will live longer than you expect. That sounds great, but your income plan needs to be able to fund those years of retirement (unless you plan on hustling Pinochle when you’re […]
The fixed percentage withdrawal strategy is the polar opposite of constant inflation-adjusted spending. Subsequent strategies we consider will strive to strike a balance between these two. This fixed percentage strategy calls for retirees to spend a constant percentage of the remaining portfolio balance in each year of retirement.
As David Blanchett says: failure is really only failure if wealth is depleted while you are still alive, not just over an arbitrarily long time period.
In regards to my last column, I find it helps to visualize the data, and Exhibit 1 shows the specific spending rates for a variety of asset allocations and retirement lengths. It also shows the withdrawal rates implied by the required minimum distribution (RMD) rates set by the IRS for tax-deferred retirement accounts.
The 4% rule has a planning horizon of thirty years. But is that a long enough horizon?