Making Sense Out of Variable Spending Strategies for Retirees

I’ve finished a new research article called, “Making Sense Out of Variable Spending Strategies for Retirees.” There are countless strategies out there, and this is my effort to do what the title says. I think this is important for a number of reasons:


  1. Discussions of different strategies are usually based on different market assumptions, which makes comparisons between them more difficult.
  2. The traditional “failure rate” measure (which indicates when the financial portfolio is depleted) shouldn’t be used with variable strategies because the spending level for different strategies might be quite different in the period leading up to failure, and because failure is technically impossible for some variable strategies.
  3. We need to be able to keep track of upside spending potential with different strategies, while also finding a way to calibrate the downside risks that a retiree is willing to accept
  4. Individuals with greater risk capacity (either because they are more flexible with spending or because they have more secured income sources from outside their portfolio) may be willing to allow more downside risk to spending for the hope of obtaining greater upside potential
  5. Different strategies will imply different spending patterns over retirement, either because those patterns are pro-programmed into the strategy or because the the way that spending and portfolio returns interact

And so what I do in this article is to create tables which provide 13 numbers to summarize each strategy: the initial withdrawal rate, the real spending amounts (10, 20, and 30 years into retirement) and real remaining wealth (30 years into retirement) in good market, average market, and poor market outcomes.

I also calibrate the downside risks by adjusting the initial spending rate in the way which meets the XYZ formula: the retiree willingly accepts an X% probability that spending falls below a threshold of $Y (in real terms) by year Z of retirement.  This formula fixes the problems listed above for the aforementioned failure rate measure.

This table shows the variable spending strategies which I analyze in the paper:

variable spending strategies in retirement

The purpose of the article is to develop a framework for retirees to think about how to approach the retirement spending question. The matters discussed in the article will need to be personalized and updated for capital market expectations, fees, risk capacity, planning horizon, asset allocation, desired spending direction (i.e. frontload or backload spending),  and spending and legacy goals.

Then the different variable spending strategies can be calibrated to an XYZ formula and then be compared properly to one another.

I think it would be great to develop a calculator for this at my website, and I’ll be looking into this possibility.


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