Thursday, May 14, 2015

Want to Really Take the Guess-Work Out of Your Retirement Spending Budget?

Once again we read in the popular press about the 4% Rule and the tinkering that will be necessary to make this rule (or some form of this rule) possibly work in retirement.   In his May 13, 2015 article, 4 Reasons Why the 4% Rule Isn’t a Hard and Fast Rule, David Ning tells us that spending needs to be adjusted in retirement.  His “hard and fast” advice for doing this is that “you will be tempted to spend more in bull markets” and “you should decrease spending in bear markets.”  In her May 8 article in The New York Times, New Math for Retirees and the 4% Withdrawal Rule, Tara Siegel Bernard quotes several industry experts with various opinions about the 4% rule and different adjustments that might make the rule work.  The experts in this area continue their search (using their Monte Carlo modeling) for a Holy Grail spending rule to replace the now-suspect 4% Rule.  So, what is a poor retiree to do now without a clear, simple spending rule of thumb?

Sorry folks, but a retiree’s budget problem is basically an actuarial problem that requires an actuarial solution.  The retiree (or the retiree’s advisor) needs to periodically match the retiree’s assets with her liabilities.  What are the retiree’s assets?  They include her accumulated savings and the present value of retirement income from other sources (such as annuities or pensions).  What are the retiree’s liabilities?  These include the present value of future annual spending budgets, the present value of the amount the retiree wishes to leave to heirs and the present value of other expenses such as long-term care.  Any simple spending rule of thumb that doesn’t attempt to match these assets and liabilities (and most common approaches don’t) runs a significant risk of not meeting the retiree’s spending objectives.

Ok, we’ll does this actuarial solution come in the form of a simple rule of thumb like the 4% Rule?  No.  It doesn’t.   And while periodically matching assets and liabilities requires some number crunching, the Actuarial Approach and spreadsheets set forth in this website do most of the work for you.  The process is relatively straightforward and doesn’t require you to be an actuary.

As we said in our post of August 2, 2014, Are You “Most People”?, the Actuarial Approach is not for everyone.  It for someone who wants more than a questionable simple rule of thumb who is willing to do a little number crunching for the purpose of taking the guess-work out of developing a reasonable spending budget.