Recently, in her Motley Fool article, A Big Reason the Famous 4% Rule May Not Work for Your Retirement, Maurie Backman confirmed what we have been telling our readers for years—you aren’t going to solve the decumulation problem in retirement by assuming you (or your client) will spend the same real dollar amount each year in the future. While Ms. Backman focuses on the 4% Rule, her criticism applies to most different types of Strategic Withdrawal Plans (SWPs) and even many Monte Carlo simulation approaches typically used by financial advisors today.
According to Ms. Backman,
“… the 4% rule has a big flaw that could make it unsuitable for you. And it has to do with how you spend your money.
Retirement spending isn't always linear”
If you want to front-load your spending in retirement or you simply have non-linear planned or unplanned expenses, such as
- Mortgage repayments
- Pre-Medicare health insurance
- Planned vacations until a specified age
- New automobile purchases
- Assistance with grandchildren education
- Unexpected or expected medical or dental costs
- Long-term care costs
- Family support
- Home remodeling
Then using a SWP to supplement your Social Security benefits will likely be inconsistent with your spending goals.
In response, Ms. Backman advises:
“But all told, there’s no reason to stick to the 4% rule if you find it too limiting. If that’s the case, figure out your income needs early on in retirement versus later, and run some calculations to make sure your nest egg can support your plans. If it can, then there’s no need to follow a withdrawal rule that doesn’t result in the retirement you’ve been dreaming of.”
Thank you, Ms. Backman. We couldn’t have said it any better. So, if you are looking for a robust Strategic Spending Plan that can handle these non-linear expenses (and non-linear sources of income as well) and can help you manage your spending and your risks during retirement, you have found it here with the Actuarial Approach.
