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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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.

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 He defined the sustainable spending rate as the percentage of retirement date assets which can be withdrawn, with this amount adjusted for inflation in subsequent years, such that the retirement portfolio is not depleted for at least thirty years.

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