Saturday, March 3, 2018

Developing a Sustainable Spending Plan (SSP) vs. Using a Systematic Withdrawal Plan (SWP)

We still see quite a bit of literature in the popular press encouraging retirees to use specific Systematic Withdrawal Plans (SWPs) to determine withdrawals from their accumulated savings.  For example, the recent article, “No Pension? You Can ‘Pensionize’ Your Savings” discusses the “Spend Safely in Retirement” strategy developed by Steve Vernon, Joe Tomlinson and Dr. Wade Pfau in collaboration with the Society of Actuaries.  The SWP advocated in their report is the IRS Required Minimum Distribution approach we discussed in our post of December 21, 2017.  In addition, we are aware that many researchers and financial advisors still advocate the use of SWPs, and some even confusingly refer to these “withdrawal plans” as “spending plans.”  Therefore, we will once again
  • attempt to draw the distinction between spending plans (and in particular Sustainable Spending Plans (SSPs)) and SWPs, and 
  • Indicate why we believe SSPs are superior to SWPs

SWPs provide a retiree with an algorithm for withdrawing funds from their investment portfolio.  Sometimes this is also referred to as “tapping” one’s savings.   Common examples are the 4% Rule and the IRS RMD approach.  SWPs can be very simple or very complicated (with floor and ceiling adjustments, etc.) but all involve systematic withdrawals from accumulated savings.  It is generally assumed that the amount withdrawn for the particular year under the SWP plus income from other sources (IFOS) for that year will be spent by the retiree (or couple). 

A SWP isn’t coordinated with the amount or timing of income the retiree (or retired couple) may have from other sources (IFOS).  Assuming a retiree’s IFOS is reasonably constant from year to year, it is possible that adding the SWP withdrawal to the IFOS for the year may be consistent with the individual’s spending goals.  However, even assuming that this is the case, the SWP only focuses on recurring spending needs and does not consider non-recurring spending needs the retiree may have, such as unexpected expenses, long-term care costs or specific bequest motives.  As noted in the Society of Actuaries’ recent report, Shocks and the Unexpected: An Important Factor in Retirement, “Successful provision for the unexpected is critical to success in financial management during retirement.”  So, any SWP will be deficient in this regard.


A Sustainable Spending Plan develops a spending budget that is consistent with the individual’s (or couple’s) spending goals.  Typically, these goals will include:

  • Maximizing current levels of spending without jeopardizing ability to meet future anticipated expense needs 
  • Not spending too much and not spending too little 
  • Avoiding year to year spending volatility 
  • Having spending flexibility 
  • Leaving approximately desired amounts to heirs at death
The reader will note that none of the above goals necessarily involves how much should be withdrawn from savings (or how systematic such withdrawals should be).  The focus of the SSP is on spending, not withdrawals from savings.  For example, if one member of the couple’s Social Security benefit is expected to commence at a later date than the other member, it may be very reasonable (and consistent with the couple’s spending goals) for the couple’s withdrawals from savings to be larger before the second commencement than after.  In fact, in situations where IFOS doesn’t commence at the same time or expenses are non-recurring in nature, an SSP will work much better than an SWP in meeting typical spending goals.

The Actuarial Approach advocated in this website will help you develop a SSP, not an SWP.  Under the Actuarial Approach:

  • All of your assets are considered, not just your accumulated savings 
  • All of your spending liabilities are considered, not just your recurring spending 
  • Since the amount withdrawn from savings is equal to the sustainable spending amount minus IFOS, it will automatically mitigate potential spending volatility associated with amount and timing differences that may be inherent in IFOS 
  • You can maximize current spending without jeopardizing your ability to meet expected future expenses.  For example, you can increase current real dollar spending by
o  treating travel expenses or home mortgage expense as a non-recurring expense, or
o  planning on future expenses that decrease in real dollars
  • Spending is flexible and is automatically adjusted, as a result of annual valuations, to be consistent with your goals (even if those goals change), and 
  • Periodic scenario testing will enable you to better plan for deviations from assumed future experience

Depending on personal situations and goals, SWPs may be OK for some individuals and couples, and may be just fine as a distribution option in a defined contribution plan or IRA, but generally you (or your financial advisor) can do better.  The Actuarial Approach will help you develop a much more robust spending budget (SSP) than can be obtained by simply adding an SWP amount to IFOS.  Will it take a little more work and number crunching?  Yes.  But, we believe it will be worth your while, and that is why we refer to our website as, “The spending budget website for intelligent retirees and pre-retirees (and their financial advisors) who aren't afraid to do a little number crunching to get the right answer.”