The relationship between how long you’ll live and your sustainable spending rate is a difficult piece of the retirement planning puzzle. Ultimately, a longer retirement horizon means spending less in order to sustain the available resources.

Bill Bengen’s popular 4% Rule is specifically based on a planning horizon of thirty years (so an eighty-five-year old is not necessarily limited to a 4 percent spending rate). It gets its name from its suggested spending rate for the first year of retirement. Beyond that, the spending rate evolves to compensate for inflation, and portfolio returns guide the amount of remaining financial assets.

How long will your retirement last? The impossibility of answering this question with any long-term accuracy is one of the key challenges of planning a retirement income strategy. The nature of longevity risk is that we know our life expectancy, but it is based on an average with a great deal of variability.

Click here to download a collection of Wade’s most popular retirement insights.

Two general approaches exist to deal with this unknown element of longevity:

  1. Planning for fixed retirement durations that are generally somewhere beyond life expectancy, and
  2. Making plans that specifically incorporate survival rates by age into the calculations.

The former method is the most common (the 4% rule’s fixed thirty-year horizon uses this method) and easiest to work with, but both approaches have their strengths.

Planning for a Fixed Retirement Horizon

Planning for a specific retirement time horizon begins by selecting a horizon you are unlikely to outlive, and then developing a plan that covers the entire period. The horizon should be greater than life expectancy, as retirees have a 50 percent chance of living beyond the average.

In 1994, Bill Bengen considered thirty years to be a reasonable planning horizon for sixty-five-year-old couples, resulting in a planning age of ninety-five. Many people use different planning ages, such as 100 or 105. Those who are either younger or older than sixty-five may need to plan for more or less than thirty years.

Even sixty-five-year olds may wish to plan for different retirement durations depending on how conservative they wish to be and how fearful they are of outliving their investment portfolio. A sixty-five-year old planning to live to 100 or 105 would need to plan for a thirty-five or forty-year horizon.

The assumed retirement duration is of utmost importance. Retirement simulations based on longer time horizons will guide optimal retirement income solutions toward:

  • Lower withdrawal rates,
  • Higher stock allocations, and
  • A stronger case for guaranteed income retirement products.

Writing in Harold Evensky and Deena Katz’s Retirement Income Redesigned, Bob Curtis makes a convincing case for fixed horizons. He argues that longevity is not a “probability problem,” but a “possibility problem,” adding, “What possible sense does it make to tell your client that she can spend more money now because you’re assuming in some of the Monte Carlo iterations that she’ll die early? How does a person die ‘some of the time?’”

It is a good question. But at the same time, does it make sense to lower spending now so you can plan to spend just as much at 100 as at age sixty-five, despite the low chance of living to 100? The answer is yes and no. It truly depends on your unique preferences regarding these tradeoffs.

The conservative approach is to plan for a longer horizon by spreading out distributions from your portfolio. You will have to spend less and most likely leave a larger than planned bequest. Traditional safe withdrawal rate studies ignore this risk entirely, instead focusing solely on minimizing failure.

On the other hand, planning for a shorter horizon could leave you exposed to overspending, which means you could outlive your wealth. For some, the risk of cutting spending and missing out on enjoying hard-earned wealth outweighs the risk of overspending. The impact of this risk varies from person to person depending on the value each would get from additional spending.

Exhibit 1 explores the impact of retirement length on sustainable withdrawal rates. Using historical data since 1926 and all of the baseline assumptions—including a 50/50 allocation to large-capitalization stocks and intermediate-term government bonds—the exhibit shows Bill Bengen’s SAFEMAX withdrawal rate for retirement horizons between five and forty years.

We saw before that the SAFEMAX for a thirty-year retirement is 4.03 percent. This exhibit illustrates a curve in which the SAFEMAX declines, but at a decreasing rate, as the retirement duration increases. The historical SAFEMAX for forty years reduces to 3.72 percent.

Exhibit 1

Relationship Between SAFEMAX and Retirement Duration

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

Using SBBI Data, 1926-2016, S&P 500 and Intermediate-Term Government Bonds

Relationship Between SAFEMAX and Retirement Duration

Retirement Researcher 2017

Relationship Between SAFEMAX and Retirement Duration

Next, Exhibit 2 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, so the government provides RMDs for younger ages as well. Including the RMD withdrawal rates in this exhibit allows us to compare historical SAFEMAXes and RMDs for different time horizons. These are lined up in the exhibit to imply a planning age of 100.

Exhibit 2

Varying SAFEMAXes by Retirement Duration and Asset Allocation

Inflation-Adjusted Spending

Using SBBI Data, 1926-2016, S&P 500 and Intermediate-Term Government Bonds

Retirement Duration 100% Stocks 75% Stocks 50% Stocks 25% Stocks 0% Stocks RMDs Age
1 100 100 100 100 100 14.93 99
2 38.51 41.82 44.40 45.52 46.08 14.08 98
3 23.53 25.85 27.93 28.78 29.12 13.16 97
4 16.12 19.10 20.68 21.04 21.24 12.35 96
5 12.84 15.57 16.82 16.86 16.86 11.63 95
6 10.89 12.90 13.96 14.12 13.85 10.99 94
7 9.41 10.96 11.86 12.16 11.66 10.42 93
8 8.60 9.55 10.29 10.73 10.08 9.80 92
9 7.89 8.56 9.14 9.61 8.90 9.26 91
10 7.10 7.68 8.16 8.55 7.93 8.77 90
11 6.54 7.06 7.50 7.83 7.08 8.33 89
12 6.13 6.61 6.99 7.27 6.36 7.87 88
13 5.78 6.22 6.56 6.81 5.77 7.46 87
14 5.53 5.94 6.25 6.38 5.30 7.09 86
15 5.30 5.71 6.01 5.98 4.91 6.76 85
16 5.08 5.51 5.78 5.67 4.57 6.45 84
17 4.88 5.26 5.55 5.40 4.26 6.14 83
18 4.73 5.07 5.34 5.16 4.01 5.85 82
19 4.58 4.92 5.18 4.94 3.78 5.59 81
20 4.42 4.78 4.98 4.75 3.56 5.35 80
21 4.28 4.66 4.82 4.58 3.39 5.13 79
22 4.16 4.56 4.70 4.43 3.24 4.93 78
23 4.08 4.46 4.57 4.30 3.10 4.72 77
24 4.01 4.38 4.47 4.17 2.98 4.55 76
25 3.95 4.30 4.38 4.06 2.86 4.37 75
26 3.89 4.22 4.29 3.97 2.76 4.20 74
27 3.85 4.16 4.22 3.87 2.66 4.05 73
28 3.83 4.10 4.15 3.78 2.57 3.91 72
29 3.80 4.05 4.09 3.70 2.48 3.77 71
30 3.77 3.99 4.03 3.62 2.40 3.65 70
31 3.75 3.95 3.99 3.54 2.33 3.60 69
32 3.73 3.92 3.94 3.47 2.26 3.50 68
33 3.71 3.89 3.91 3.40 2.20 3.40 67
34 3.70 3.87 3.88 3.34 2.14 3.31 66
35 3.68 3.85 3.85 3.28 2.08 3.23 65
36 3.67 3.83 3.83 3.21 2.03 3.14 64
37 3.66 3.81 3.80 3.14 1.98 3.06 63
38 3.65 3.78 3.77 3.09 1.93 2.99 62
39 3.63 3.76 3.74 3.03 1.88 2.91 61
40 3.62 3.74 3.72 2.98 1.83 2.84 60

 

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 with less risk. But as the horizon lengthens, the amount that can be safely supported with bonds declines. Eventually, stocks are able to support more spending despite their greater volatility.

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 SAFEMAXes for a 50/50 portfolio as they relate to the time horizon. The SAFEMAX is about 8 percent for ten-year horizons, 6 percent for fifteen, 5 percent for twenty, and 4 percent for thirty years.

Exhibit 3 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 SAFEMAXes 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 discuss variable spending strategies in-depth at a later time. The lesson for now is that the assumed retirement horizon is a very important consideration for deciding on a withdrawal rate.

Exhibit 3

Connection Between SAFEMAX with Planning Age of 100, and RMDs

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

Using SBBI Data, 1926-2016, S&P 500 and Intermediate-Term Government Bonds

Connection Between SAFEMAX with Planning Age of 100, and RMDs

Retirement Researcher 2017

Connection Between SAFEMAX with Planning Age of 100, and RMDs

30 Comments

  1. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  2. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  3. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  4. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  5. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  6. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  7. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  8. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  9. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  10. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  11. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  12. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  13. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  14. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  15. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  16. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  17. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  18. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  19. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  20. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  21. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  22. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  23. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  24. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  25. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  26. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  27. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  28. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  29. […] post What’s the Most Appropriate Planning Age for Retirees? appeared first on Retirement […]

  30. […] What’s the most appropriate planning age for retirees? – Wade Pfau […]

Leave a Comment





Retirement Researcher is a SEC registered investment adviser. The content of this publication reflects the views of Retirement Researcher (RR) and sources deemed by RR to be reliable. There are many different interpretations of investment statistics and many different ideas about how to best use them. Past performance is not indicative of future performance. The information provided is for educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy or sell securities. There are no warranties, expressed or implied, as to accuracy, completeness, or results obtained from any information on this presentation. Indexes are not available for direct investment. All investments involve risk.

The information throughout this presentation, whether stock quotes, charts, articles, or any other statements regarding market or other financial information, is obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Neither our information providers nor we shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission there of to the user. RR only transacts business in states where it is properly registered, or excluded or exempted from registration requirements. It does not provide tax, legal, or accounting advice. The information contained in this presentation does not take into account your particular investment objectives, financial situation, or needs, and you should, in considering this material, discuss your individual circumstances with professionals in those areas before making any decisions.