Which Retirement Are You Buying?
For many, the default approach seems to be to just “save what I can” for retirement. Individuals taking this approach usually save what’s “leftover” after making payments on their home, car and credit cards and covering their expenses of daily living. People generally recognize that they should save at least enough to capture their employer’s 401(k) match, if such a match exists, lest they “leave money on the table” each year.
How Much Income Do I Need in Retirement?
Most people are focused on saving for retirement so they’ll have the money they need to fund their income in retirement. However, ask most people how much they’re going to spend in retirement and they have no idea. To plan for retirement effectively, you need to have some sense of what your spending needs are actually going to be.
Ratcheting Up Retirement Spending
In 2015, Michael Kitces proposed a ratcheting rule for retirement spending that shared the basic framework of constant inflation-adjusted spending while still allowing spending to increase if the portfolio performs well in retirement. As with many of these rules, the ratcheting rule could be implemented in numerous ways.
Floor And Ceiling Retirement Spending, With A Twist
In a 2013 article, a Vanguard research team headed by Colleen Jaconetti developed an alternative form of the floor-and-ceiling spending rule that relies on percentages rather than hard dollar amounts.
What Is The ‘Floor & Ceiling’ Retirement Spending Strategy?
In a 2001 article, William Bengen offered a new balance between the constant amount and fixed percentage strategies with his “floor and ceiling” spending approach.
Seeking A Fixed Percentage Approach To Retirement Spending
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.
The Problems With A Constant Retirement Spending Strategy
The first method to be tested is the original constant inflation-adjusted withdrawal strategy introduced in William Bengen’s 1994 article, “Determining Withdrawal Rates Using Historical Data.” This will serve as a baseline for subsequent comparison with other strategies. Bengen’s rule says to adjust spending annually for inflation and maintain constant inflation-adjusted spending until the portfolio depletes.
The Most Important Investment Decision You’ll Ever Make
When most people think about investing, they’re thinking about stuff that doesn’t really matter. They’re caught up in the minutiae: What fund should I own? How fast did the iPhone 7 sell out (and are people really going to be okay with no headphone jack)? What sector is going to take off this fall? But that’s not really what determines your portfolio’s fate. What really matters is your ratio between stocks and bonds.
10 Variable Spending Strategies Retirees Should Consider
By reviewing existing research on variable spending, we can identify and describe key representative variable spending strategies from the countless possibilities, and classify them into a general taxonomy.
Retirees Should Look Beyond Their Investments For Income Planning
How exactly should retirees adjust their spending in response to changes in the value of their retirement portfolios? Countless variations on spending rules are discussed everywhere from research papers to internet discussion boards.
