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Making Sense Out of Variable Spending Strategies for Retirees

18 Pages Posted: 17 Mar 2015  

Wade D. Pfau

The American College; McLean Asset Management

Date Written: March 16, 2015

Abstract

Variable spending strategies can be situated on a continuum between two extremes: spending a constant amount from the portfolio each year without regard for the remaining portfolio balance, and spending a fixed percentage of the remaining portfolio balance. Variable spending strategies seek compromise between these extremes by avoiding too many spending cuts while also protecting against the risk that spending must subsequently fall to uncomfortably low levels. Two basic categories for variable spending rules explored include decision rule methods and actuarial methods. Ten strategies will be compared using a consistent set of portfolio return and fee assumptions, and using an XYZ formula to calibrate initial spending: the client willingly accepts an X% probability that spending falls below a threshold of $Y (in inflation-adjusted terms) by year Z of retirement. Presenting the distribution of spending and wealth outcomes for different strategies in which the initial spending rate is calibrated with the XYZ formula will allow for a more meaningful comparison of strategies. The article provides a framework for identifying appropriate spending strategies based on client preferences.

Keywords: retirement planning, retirement income modeling, systematic withdrawals, variable spending in retirement

JEL Classification: C15, D14, G11, G17

Suggested Citation

Pfau, Wade D., Making Sense Out of Variable Spending Strategies for Retirees (March 16, 2015). Available at SSRN: https://ssrn.com/abstract=2579123 or http://dx.doi.org/10.2139/ssrn.2579123

Wade Pfau (Contact Author)

The American College ( email )

Bryn Mawr, PA 19010
United States

HOME PAGE: http://www.retirementresearcher.com

McLean Asset Management ( email )

8200 Greensboro Dr
# 1150
McLean, VA
United States

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