Thursday, December 12, 2013

New Research On Variable Spending Strategies (Like the One Recommended in This Blog)

In this December 10 article, Dr. Pfau compares the spending paths created by two variable withdrawal strategies: The Guyton Decision Rules and the Blanchett actuarial approach discussed in our November 20 post.  Unfortunately, Dr. Pfau's compares what is essentially a spending smoothing algorithm (Guyton) with year-by-year application of Blanchett's spreadsheet calculator without application of any smoothing of the results. However, as Dr. Pfau revealed in his article, Mr. Blanchett, "would almost certainly incorporate a moving average approach to smooth out the cash flows."
As I said in my original 2010 article (available in the articles section), the most important step in the five step general actuarial process to developing an estimate of how much you can spend each year involves periodic calculation of the theoretically correct spendable amount (using the simple spreadsheets found in this website, or Mr. Blanchett's spreadsheet or some other more "robust" calculator) and application of an algorithm to smooth actual experience as it occurs. See our post of October 11, 2003 for our recommended smoothing algorithm.
Dr. Pfau concludes that, "More research about variable withdrawal rates should look to build in a smoother spending path with changes only made when thresholds are crossed, and to more carefully calibrate the relationship between withdrawal rates and age." I agree and encourage Dr. Pfau to look at the approach recommended in this website.