Words Matter

Generally, our posts are written by Ken and are reviewed by Bobbie. This post is a bit different from our others in that it is co-written by both Ken and Bobbie, because she is very interested in being precise with terms. Since we often use terms that may not be familiar to our readers, Bobbie believes that we should define these terms so that all know what is meant by them.

What is Your Plan for Future Spending in Retirement?

The three key drivers involved in determining how your (or your household’s) assets will be spent in retirement generally are:

1. Your (or your household’s) future lifetime(s),
2. Your future investment returns, and
3. The pattern of your current and future spending

This post will focus on item 3. We will discuss recent research into actual observed spending patterns and possible implications for your financial plan.

Stress Testing Your Retirement Plan for Rising Interest Rates / Inflation

In our post of January 29, 2021, we suggested that you consider periodically stress-testing your retirement plan for unfavorable future investment experience by performing a 5-year spending budget projection assuming future assumed “crash-like” Equity returns. We included a 5-year projection example in that post for a couple who followed our Recommended Financial PlanningProcess.  The couple in that example experienced no decrease in their projected Essential Expense spending during the five-year projection period, but did experience fairly significant (but presumably manageable) decreases in their discretionary spending in the initial years of the five-year projection.

Life Annuities Can Be Worth More Than What You Pay for Them

At How Much You Can Afford to Spend, we encourage retirees (and retired couples) to adopt a Liability Driven Investment (LDI) strategy and consider building a Floor Portfolio of low-risk assets to fund their essential expenses.   Low-risk assets include lifetime income sources like Social Security, pensions and life annuities as well as other investments like cash and individual bonds.  In our post of February 2, 2021, we discussed how relatively easy it is to build your own Floor Portfolio.

Yes, “Probability-of-Success-Driven Guardrails” is a Good First Step

Kudos to Michael Kitces and Derek Tharp for attempting to fix some of the deficiencies in spending models typically used today by financial advisors, as previously discussed in our post of July 23, 2020. In their post of March 3, 2021, they highlight some of the problems with Strategic Withdrawal Plans (SWPs) and Monte Carlo models typically used today by financial advisors, and they propose incorporating the guardrail concept for determining annual withdrawals in SWPs advocated in the “Guyton-Klinger Rule” into Monte Carlo “Probability of Success” models to enable financial advisors to better advise their clients. And while we believe the resulting “Probability-of-Success-Driven Guardrails” (or Kitces/Tharp) approach is definitely an improvement over current practice, we remain unconvinced that it is superior to the Recommended Financial Planning Process advocated in this website.