Sustainable Spending

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.

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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 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.

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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 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 He defined the sustainable spending rate as the percentage of retirement date assets which can be withdrawn, with this amount adjusted for inflation in subsequent years, such that the retirement portfolio is not depleted for at least thirty years.

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