By Ian McGugan
Globe and Mail
Accumulating wealth is a challenge. But “decumulating” it can be trickier still.
The problem is that you don’t know many of the key elements that would enable you to come up with a perfect plan for tapping your money in retirement. How long will you live? What will market returns be like? And in what sequence will those returns appear? The answers to all those questions are unknowable.
Hence the growing fascination with so-called decumulation strategies for consuming retirement nest eggs. The strategies include the simple and much-quoted 4-per-cent rule, as well as much more complicated sets of guidelines and formulas. Each approach has enthusiastic fans.
To help bring some order to this jumble, it would help to put all the leading strategies side by side. And that’s exactly what Wade Pfau, a professor of retirement income at American College in Bryn Mawr, Penn., has done.
His new paper, Making Sense Out of Variable Spending Strategies for Retirees, compares 10 systems for drawing down your savings in retirement. His research demonstrates that even experts have widely different opinions on the issue.
It also helps explain why arguments about retirement strategies often resemble a shouting match among people who don’t speak a common language. The essential problem, and the reason for all that shouting, is that you can evaluate any given approach on many different criteria.
The 4-per-cent rule, for instance, says that if you start retirement by withdrawing 4 per cent of your initial portfolio, and every year bump up that starting amount in line with inflation, you will not run out of money over a 30-year retirement. Based upon market history in the United States and Canada, this is nearly always true.
So judged on one criteria – will it ensure you don’t outlive your money? – the 4-per-cent rule works out pretty well. It also scores well on another criterion: It keeps your spending at a constant level, in after-inflation terms.
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