“Safe” Withdrawal Rate Brouhaha

Periodically, we read articles from William Bengen, the inventor of the safe withdrawal rate (otherwise known as the 4% Rule), from various esteemed retirement academics, from the retirement researchers at Morningstar or from other retirement experts about this year’s version of the 4% Rule. For example, in 2021, Morningstar experts told us that the initial safe withdrawal rate was 3.3%. Then in 2022, they told us that it was 3.8%, and this year, it is back up to 4% as long as equity investments don’t exceed 40% of the retiree’s portfolio. And while the basic safe withdrawal rate may vary somewhat from year to year based on current economic conditions and whether or not it is followed blindly without adjustment (increasing the initial withdrawal amount by inflation each year), researchers generally have determined that historical investment experience supports a conclusion that an annual withdrawal in the neighborhood of 3-5% of a retiree’s portfolio at retirement, increased annually by inflation, has a high probability of lasting at least 30 years without depleting portfolio assets, assuming about 50% of the portfolio assets is invested in equities.

We’ve Changed the Default Assumptions in the Actuarial Financial Planner Models

The last time we changed the default assumptions in our Actuarial Financial Planner (AFP) models was May of last year. Because interest rates on government-issued securities have increased significantly since then, implied investment returns on immediate annuities have also increased and expectations for future inflation have decreased, we have decided to change the default assumptions used in the AFPs as follows:

• Increase Investment return on Floor Portfolio assets from 4.5% per annum to 5.0% per annum,
• Increase Investment return on Upside Portfolio assets from 7.5% per annum to 8.0% per annum, and
• Decrease annual rate of inflation from 3.5% per annum to 3.0% per annum.

Note that we have increased the “real” assumed rates of return on Floor and Upside Portfolio assets by 1% per annum. We have not changed the default assumptions used in the model for lifetime planning periods.

Confidently Boost Your Spending in Retirement with the Actuarial Approach

As discussed many times in this website, the Actuarial Approach employs a model and a process that involves systematic comparison of household assets and liabilities and tracking of the resulting household Funded Status over time for the purpose of making better financial decisions in retirement, including decisions relating to spending and investment. This is the same general process used by actuaries to help ensure the financial sustainability of many other financial systems, such as Social Security and defined benefit pension plans.

And while we tend to focus on avoiding over-spending in retirement, there are certain households that could probably afford to spend more if they wanted. In his well-written Kitces.com post of November 8, 2023 Adam Van Deusen outlines several technical framing strategies and behavioral tactics to help spending-hesitant clients increase their spending in order “to have a more enjoyable retirement.” We generally agree with Mr. Van Deusen’s recommendations and encourage you to read his article. In this post, we will focus on his recommended technical framing strategies (summarized below) and discuss how these strategies are easily accomplished using the Actuarial Approach. 

Bucketing by Expense Type with the Actuarial Approach

Many financial advisors employ time segmentation buckets (sometimes simply referred to as “bucketing”) to help their clients fund their desired retirement spending. This usually involves three buckets based on the expected timing of future spending: short-term, intermediate-term and long-term spending. The Actuarial Approach advocated in this website encourages the use of a different bucketing strategy that involves two buckets that separate future expenses into “essential” and “discretionary” spending. This strategy was recently discussed in the October 30 Financial Advisor article entitled, “Michael Kitces warns Advisors About Sequence Risk, Defends 4.0% Rule.” Mr. Kitces is a well-known retirement thought leader for financial advisors. 

This post will set forth some of Mr. Kitces’ comments about the bucketing-by-expense-type strategy we recommend and will supplement Mr. Kitces’ comments with our commentary.