Thursday, April 2, 2015

The Final Say on Spending Rules—Not

Laurence Siegel has followed up his provocatively titled piece, “The Only Spending Rule Article You Will Ever Need” (discussed in our post of March 22, 2015) with an article in Advisors Perspectives entitled “The Final Say on Spending Rules.”  As previously discussed, I agree with a lot of what Mr. Siegel has to say, for example:
  1. “with risky investments, there is no such thing as a safe withdrawal rate (other than zero).” 
  2. The “magic formula”—“It’s not a single formula, but a procedure.”
  3. It is important to periodically (annually) balance the market value of the retiree’s assets with the market value of her liabilities (present value of future constant real-dollar spending), with such market value of liabilities determined on a basis that is reasonably consistent with life insurance annuity pricing.
  4. Retirees who combine the purchase of life annuities (immediate or deferred) with conventional investing can benefit from risk pooling to cover some or all of their longevity risk. 
Where we disagree (other than over what I assume is Mr. Siegel’s tongue-in-cheek title, since he himself acknowledges that “there is much more to decumulation than just [the two methods he discusses in his article]:”
  1. I believe developing a spending budget is part art and part science, and if the Actuarial Approach is used, it somewhat self-correcting from year to year.  Therefore, I am not distressed if the matching of assets and liabilities referred to in item 3 above is not exactly determined based on the discount rate (or yield curve) inherent in the individual retiree’s annuity purchase rate.  Additionally, I am not distressed if the retiree chooses to apply a reasonable smoothing algorithm to the budget calculated in item 3 above from year to year in a desire to avoid fluctuations or if the retiree chooses to spend more or less than the spending budget in a given year (see my previous post). 
  2. Mr. Siegel’s “magic formula” isn’t very sophisticated and doesn’t coordinate with other potential fixed dollar sources of retirement income such as pension benefits or immediate or deferred life annuity income.  I’m not saying that the simple spreadsheets included in this website are particularly sophisticated either, but at least they permit a retiree or advisor to determine a spending budget that is coordinated with other sources of retirement income and the retiree’s bequest motive.  No.  The simple spreadsheets provided in this website aren’t magical.  They are just simple math and their Run-Out tabs show the components of future expected spending budgets (excluding Social Security or other inflation indexed sources of retirement income) and the expected decumulation of invested assets over the input payout period.