Wade Pfau, Ph.D., CFA, RICP®

How Much You Should Spend In Retirement Depends On How Long You Think You’ll Live

In regards to my last column, I find it helps to visualize the data, and Exhibit 1 shows the specific spending rates for a variety of asset allocations and retirement lengths. It also shows the withdrawal rates implied by the required minimum distribution (RMD) rates set by the IRS for tax-deferred retirement accounts.

The requirements apply after age 70.5, but those with inherited IRAs may have to withdraw at earlier ages using these rules, meaning the government provides RMDs for younger ages as well. Including the RMD withdrawal rates in this exhibit allows us to compare historical SAFEMAXs and RMDs for different time horizons. These are lined up to imply a planning age of 100.

Click here to download Wade’s fact sheet, “How Long Can Retirees Expect to Live Once They Hit 65?”

Exhibit 1
Varying SAFEMAXs by Retirement Duration and Asset Allocation
Inflation-Adjusted Spending
Using SBBI Data, 1926-2015, S&P 500 and Intermediate-Term Government Bonds

We can observe a number of important points about asset allocation with this table. For instance, a 100% bond allocation supports a higher withdrawal rate than a 100% stock allocation until the time horizon is thirteen years. Beyond that point, 100% stocks supports a higher withdrawal rate than 100% bonds.

With shorter time horizons, bonds more effectively lock in a goal at a higher withdrawal rate without risk, but as the horizon lengthens, the amount that can be safely supported with bonds declines. Eventually, stocks are able to support more despite their greater volatility when the time horizon is long enough.

Nonetheless, diversification is important. A 50/50 asset allocation always supports a higher SAFEMAX than 100% stocks at all time horizons, and it supports a higher SAFEMAX than 100% bonds after a time horizon of six years.

We can also see a rule of thumb developing about the historical SAFEMAXs for a 50/50 portfolio as they relate to the time horizon. The SAFEMAX is about 8% for ten-year horizons, 6% for fifteen, 5% for twenty, and 4% for thirty years.

Exhibit 2 provides a visual comparison between the SAFEMAX for a 50/50 asset allocation calibrated to a planning age of 100, and the RMD rules. These curves are relatively close together, but the RMDs become more conservative as you approach age 100.

This makes sense, since as you approach the planning age, it becomes increasingly likely that you will live beyond it. RMDs are also more conservative until about age seventy-five, implying lower spending than historical SAFEMAXs for the early part of retirement.

Using the RMD rules to set withdrawal rates for each year of retirement presents a viable alternative to using constant inflation-adjusted withdrawal amounts. I will return to this topic later when I discuss variable spending strategies. The lesson for now is that the assumed retirement horizon is a very important consideration.

Exhibit 2

Connection Between SAFEMAX with Planning Age of 100 and RMDs

For a 50/50 Asset Allocation, Inflation-Adjusted Spending

Using SBBI Data, 1926-2015, S&P 500 and Intermediate-Term Government Bonds


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