Spending Goals

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…

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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 will 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.

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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.

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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.

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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.

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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.

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