Comparing Retirement Spending Rules Using Historical Data & The PAY Rule™
Thus far, we have looked at applying a 4% initial withdrawal rate to the different retirement spending strategies. In such cases, we did not use an XYZ rule to calibrate the level of downside risk as the initial spending rate was always the same.
How Much Wealth Will You Have 30 Years Into Retirement?
Thus far, we have compared the historical performance of various spending strategies when the initial spending rate is 4%. Over the next couple weeks, we will apply an XYZ rule and consider how spending may be impacted by the low-interest-rate environment facing retirees.
Which Retirement Spending Strategy Is Right For You?
Deciding on the right retirement spending strategy for your particular situation is both incredibly difficult, and incredibly important. There are huge numbers of reasonable options, but how do you know which is right for you? The answer depends on several factors.
Retirement Spending And Required Minimum Distributions
One final spending rule serves as a reasonably easy way to implement an actuarial method for retirement spending. Actuarial methods generally have retirees recalculate their sustainable spending annually based on the remaining portfolio balance, remaining longevity, and expected portfolio returns.
Retirement Income Planning Is As Easy As PAY
As an alternative to failure rates, I suggest calibrating the downside risk across strategies in order to match them for a level of risk the retiree is comfortable taking. This calibration is done with a customized “XYZ formula” that I first outlined in my article, “Making Sense Out of Variable Strategies for Retirees” in the Journal of Financial Planning.
The Perks Of Being A Flexible Spender In Retirement
William Bengen’s 1994 article introduced the concept of the 4% rule for retirement withdrawals. He defined the sustainable spending rate as the percentage of retirement date assets which can be withdrawn, with this amount adjusted for inflation in subsequent years, such that the retirement portfolio is not depleted for at least thirty years.
Which Are You More Worried About: Running Out Of Money While You’re Alive Or Dying?
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.
Should You Plan On Your Retirement Lasting 30 Years Or 40?
The 4% rule has a planning horizon of thirty years. But is that a long enough horizon?
Retirement Spending Increases And Decreases Over Time
An important simplifying assumption in William Bengen’s research is that retirees spend constant inflation-adjusted amounts throughout retirement. This may be at odds with the spending patterns of many retirees.
Does The 4% Rule Work Around The World?
From a global perspective, asset returns enjoyed a particularly favorable climate in the twentieth-century United States, and to the extent that the U.S. may experience reversion in the twenty-first century, present conceptions of safe withdrawal rates may be unsafe.
