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New research presented by Kiplinger shows significant variations in typical withdrawal rates. As you may suspect, some of that is based on age, marital status, the existence of a steady income stream and when the RMD kicks in.
Among the interesting observations: “The “Lifetime income” effect: Retirees are willing to spend roughly 80% of their “lifetime income,” which includes Social Security, pensions, and annuities. But they are only willing to spend about half of what they could safely afford to from their investment assets, which include: managed portfolios, IRAs and brokerage accounts. Retirees spend only about 40% to 50% of what would be considered a “safe” withdrawal from these pools of resources.
In any case, the typical single withdrawal rate is reported as age 65 – 1.9%, age 75 – 4.4% and age 80 – 4.6%.
For married folks age 65 – 2.2%, age 75 – 3.2% and age 80- 3.8%
Not sure what this means other than there is no such thing as a single desirable withdrawal rate and there is significant value in a steady income stream in retirement-neither of which are a revelation.
It anecdotally looks like many people (especially those who access sites like Humble Dollar and Bogleheads) may be underspending defensively due to an unknown future. I do this myself.
Especially those who have been fortunate enough to fall under these positive situations:
Although using a Safe Withdrawal Rate (SWR) is a highly touted “rule of thumb” it has its issues.
The most common SWR is the 4% Rule. It suggests you take 4% of your initial portfolio balance in Year 1, then adjust that fixed dollar amount for inflation every year thereafter, regardless of what the stock market does.
The Flaw: It is “blind” to current conditions. If the market crashes (a “sequence of returns” risk), you keep withdrawing the same inflation-adjusted amount, which can rapidly deplete a shrinking portfolio.
The Result: To avoid going broke in a worst-case scenario, the 4% rule is intentionally too conservative for most people. This often leads to “over-saving” or dying with a massive surplus you could have enjoyed while younger.
Because of the above, in addition to other financial tools I use (including Boldin which I really like), I have recently been exploring the use of a tool called “TPAW Planner” (Total Portfolio Allocation and Withdrawal) .
It is highly customizable to unique individual financial situations, risk tolerance, and legacy goals, and dynamically adjusts based on market conditions.
If you haven’t taken a look at this, I’d recommend taking it for a spin as it may help you better evaluate how much you can spend without fear of the unknown (something I have a lot of).
I think you are right about underspending. However, I don’t think the flaw for the 4% rule is valid. Doesn’t that strategy already take such market variables into account?
I’m no financial expert but here is my take…
SWR is based on historical backtesting and sometimes incorporates Monte Carlo analysis. Monte Carlo simulation runs thousands of “what-if” scenarios by randomly shuffling historical market returns (volatility and average growth) to see how your portfolio holds up. Based on criteria you set you then choose a SWR rate to use from start to end.
A fixed SWR doesn’t instruct you on what, if any, adjustments should be dynamically made over time based on changes in the market. It only bases periodic changes on the inflation seen in that period.
An SWR based on looking back over historical returns does not predict what will happen year in and year out into the future.
TPAW (Total Portfolio Allocation and Withdrawal) uses an Amortization-based Withdrawal (ABW) method. It calculates your safe spending every year based on the criteria you set looking at real changes in the market and inflation in that specific time period.
Bogleheads has a large conversation on TPAW as well as what can be found at the TPAW tool’s website in the help documents. The link to the Bogleheads conversation is at:
https://www.bogleheads.org/forum/viewtopic.php?t=331368
These references would do a much better job than me of expressing the pros and cons of SWR vs TPAW.
Also, I failed to mention that even though the referenced tool advocates and defaults to the “TPAW” strategy, it also provides the ability to show results based on choosing an “SWR” strategy and something it calls an “SPAW” strategy.
So either way, even if you choose to use “SWR” it is a very useful and powerful tool 🙂
We have never used nor plan to use any % spend rate in retirement.
Not that I am against it (although when people start debating to the decimal point it seems a bit pointlessly specific); I just never felt the need.
I employed a version of the “Bucket” strategy over 20 years ago which evolved over many years before retirement as the framework for our finances and establishing an inflation adjusted “salary” going forward into retirement. The “salary” is provided by the investment portfolio buckets alone-no annuities or pensions and if we ever see any Social Security $ it will be considered a bonus not an assumption.
Another benefit of the Bucket approach was it gave me a very visible glideslope into retirement. I could see very clearly when the “buckets runeth over” and I was able to retire if I wished. That was a very empowering feeling while I still worked a few more years by choice.
Now in retirement, as long as our buckets line up in both present day $ and projected 3% inflation adjusted $; the “bucketized” portfolio spreadsheet is put back to sleep for another year.
The end result is basically the same as those who subscribe to the % method presumably have an annual “salary” figure too. Its just another angle of approach to the age old topic.
Could you give a simple example of your bucket strategy? Are you talking about a pool of money for specific time periods including different investments?
Sounds like a great plan, DW. Like you, I kind of snicker at the decimal point debates.
There’s a well-studied phenomenon around annuity income called “permission to spend.” Annuitants are much more likely to be at ease actually spending their income than someone drawing from a portfolio of volatile assets — even when the amounts are identical.
The psychology makes sense when you think about it: every withdrawal from a fluctuating portfolio feels like a permanent loss. Annuity income just arrives, so you treat it like a paycheck. Wade Pfau, the retirement research guy, has a lot to say about this. His view is that the behavioural value of guaranteed income is a genuinely underappreciated part of the annuity case, separate from any purely mathematical argument
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At 73 and 70, we could probably burn through 5 or 6%. However, we are only using about 1%. Why this is, I am not sure. Long term care is on my mind, as is Chrissy’s well being should I croak first. We also seem to have everything we want. Our kids already have more money than we do, so they don’t need any of ours. And I still enjoy watching our net worth grow.
Dear Dickie, are we messed up?
Not messed up in my book. I can’t really relate to the concept of spending down and living off accumulated assets. When I think of it I get shivers up my spine.
I get upset (illogically) when the market shrinks our investments even temporarily. If I didn’t have to, I would not take a RMD.
Heck, we still save each month. Thankfully, our pension and SS provide more than we need.
By all the “rules” of retirement living, I am truly messed up. I’ve tried to change my mindset and not worry about investments and spending, but no luck.
You don’t want to be on your death bed wishing you did “this or that.” I’m for spending more. As Augustus McCrae said, ‘It’s not dyin’ I’m talkin’ about, it’s livin’.”
Yeah, I know your right, August. I’m workin’ on it.
I would wager that many folks keep funds for a “rainy day”- primarily long term care events. If it is for their inheritance they could disburse more funds to their kids earlier.
Thought experiment:
excluding those who entered retirement with little to no assets, does anyone know, or heard about indirectly, someone who spent down all of their assets in retirement, such that they were forced to change their lifestyle dramatically, or literally spent or lost it all, and became destitute? “IF” the answer is a collective no, then that would support the idea that retirees fear of running out of money is overblown and that they are spending too little.
No, but I disagree with the conclusion. Had markets been different, or should they be different, the answer might be yes with sadly numerous examples, indicating those who “underspent” were right to do so.
There are a lot of variables there. I don’t know of any personally. However, I suspect those entering retirement with significant assets already know how to manage money.
Nevertheless, overblown or not, for most people the unknown over 30 years and the fear of not being able to cope must be real.
There are always WHAT IFS to think about.