Richard retired last year at this time at age 65. At that time, he used about 20% of his accumulated savings to buy an immediate life annuity that pays him $15,000 per year. At the beginning of 2013, he had $800,000 left after his annuity purchase. He inputted the assumptions recommended in our October 11, 2013 post (5% interest, 3% inflation, 30 years expected payout period (95-65) and $10,000 as the desired amount of assets at death) into the spreadsheet in this website, to determine a total spendable amount (excluding Social Security) for 2013 of $45,179 ($30,179 from accumulated savings and $15,000 from the annuity). He deposited $30,179 in his non-interest bearing spending account and decided to invest half of the remaining assets ($769,821) in equities and the other half in a variety of fixed income investments. During 2013, Richard spent exactly the amount in his spendable account plus the $15,000 from the annuity.
Easy Steps to Determine Richard's Spending Budget for 2014
The first step in the process is gather asset data as of the end of 2013. Richard's equity investments yielded almost 29% during 2013 and his fixed income investments yielded about 1%, so his end-of-year assets are $884,909 (compared with expected end-of-year assets from the previous year's calculation of $808,312, or an asset gain for 2013 of $76,597).
The second step in the process is to determine a preliminary spending value for 2014 by inputting new amounts into the spreadsheet on this website. If the same assumptions and amounts are used as last year except using $884,909 for accumulated savings and 29 years for expected payout period, Richard's preliminary 2014 spendable amount is $49,947 ($34,947 + $15,000).
The third step in the process is to apply the smoothing algorithm discussed in our October 11, 2013 post to the preliminary spending value. Richard determines that the Consumer Price Index has increased by about 1.3% during 2013. Therefore, he determines his 2014 spendable amount as last year's total spendable amount ($45,179) increased by 1.3% ($45,766), but not less than 90% of the preliminary 2014 total spendable amount of $49,947 (.9 X $49,947 = $44,952). Since the corridor value is lower than last year's value increased with inflation for the year, it does not apply and Richard's total spendable amount for 2014 is $45,766 ($30,766 from accumulated savings and $15,000 from the annuity).
Richard plans to transfer $30,766 of his accumulated savings in his spending account and rebalance the remainder ($854,143) so that he has 50% in equities and 50% in fixed income investments. He recognizes that because he has the annuity and Social Security, his actual investment mix is weighted more heavily in fixed income than equities, but he is comfortable with that result.