I think retirement analysis is finally starting to catch up to the reality of variable withdrawal rates.
Every financial adviser has "always" known that retirees don't spend as much near the end of retirement as they do at the beginning, but the knowledge has never really been used for much more than a margin of safety. Bengen and the Trinity study were among the first to give retirees an idea of how much of their principal they could consume during retirement, but it was still an assumption of fixed spending. Monte Carlo analysis has been an improvement over "running out" of historical data used in FIRECalc and other calculators, but neither has been able to accurately predict when retirees would (or should) start slamming shut their wallets. Some have used two budgets-- "bare bones" and "life is good", but it's proven difficult to program that concept into a mainstream retirement calculator. ORP has addressed this "consumption smoothing", as has Bill Sharpe's later article on efficient consumption, but the first [-]is too expensive[/-] hasn't gained broad acceptance and the second is still somewhat controversial without an actual analysis product. I think Bob Clyatt's 95% rule is the first really practical tool for cutting back ER spending.
But now the retirement media's understanding of variable withdrawals seems to be evolving from "advanced" to "mainstream". For those who do their own projections, Linda Stern's column has some interesting data:
I've always been skeptical that retirees will have the personal discipline to reduce their spending later in ER. But the fact that there's broad-based statistical evidence of the occurrence of reduced spending leads me to believe that discipline isn't necessary. In fact, the lack of overall discipline may be leading to that reduced spending. Maybe the reduction in spending really is imposed by the inevitable consequences of undisciplined living-- the external forces of reduced mobility, declining health, and senility. Or maybe the excessive spenders were all victims of "survivor bias" and are now being supported by their offspring.
Either way there's more data than there used to be. It's not just anecdotal info being swapped at CFP conferences and surveyed in obscure research journals.
Note that none of the above really address the issues of long-term care and end-of-life medical spending. However Stern also points out the useful application of SPIAs and the utility of the hypothetical "solid LTC insurance policy".
But it's nice to see some numbers in popular media that can be plugged into a spreadsheet and used for practical discussions. "Well, honey, if you think you'll be happy to reduce our spending by at least 25% starting at age 75, then we can ER tomorrow. If you don't think that's likely then you should consider working for another five years."
It'd also be nice to see FIRECalc options for "reduced spending after age 65". Andy, perhaps you need to devote more effort to FIRECalc or find someone who has the programming skills to do so. Its relevance is at stake.
Personally I don't see spouse and me ramping up today's spending. Heck, for one reason or another our spending has already been dropping ever since we ER'd. However this later-in-life spending data can support a useful discussion of whether we still care to continue hedging longevity risk with equity risk. I've been trying to work up a post on that topic but it has a long way to go.
Every financial adviser has "always" known that retirees don't spend as much near the end of retirement as they do at the beginning, but the knowledge has never really been used for much more than a margin of safety. Bengen and the Trinity study were among the first to give retirees an idea of how much of their principal they could consume during retirement, but it was still an assumption of fixed spending. Monte Carlo analysis has been an improvement over "running out" of historical data used in FIRECalc and other calculators, but neither has been able to accurately predict when retirees would (or should) start slamming shut their wallets. Some have used two budgets-- "bare bones" and "life is good", but it's proven difficult to program that concept into a mainstream retirement calculator. ORP has addressed this "consumption smoothing", as has Bill Sharpe's later article on efficient consumption, but the first [-]is too expensive[/-] hasn't gained broad acceptance and the second is still somewhat controversial without an actual analysis product. I think Bob Clyatt's 95% rule is the first really practical tool for cutting back ER spending.
But now the retirement media's understanding of variable withdrawals seems to be evolving from "advanced" to "mainstream". For those who do their own projections, Linda Stern's column has some interesting data:
...But, in general, it isn't the methodology of these studies that is troubling, but the ideas behind them. They assume, for example, that people will blithely spend their nest eggs at a fixed rate until the day they wake up at 87 or 92 with no money left. And they suggest that retirement is an all-or-nothing proposition: You either can afford to bring your lifestyle into retirement, or you can't. They don't focus -- or often, even acknowledge -- that retirement is a series of budgetary trade-offs, just like the first 2/3 or 3/4 of life.
Here are some mitigating points.
-- You'll spend more than you think for a while, but not forever. ... By the time a person passes 75 years of age, his spending is almost half of what it was for the years between 55 and 64, according to figures from the Bureau of Labor Statistics. Older retirees spend about 76 percent of what people between 65 and 74 spend. So you can aim to take more out in earlier years and take less out in later years.
-- You won't want to stay in your house forever. You may, but not many people do. So at some point in mid or late retirement, you can sell your home, downsize, and add your accumulated equity to the pot of money you have to spend (lowering your expenses along the way.) Even if you do want to stay in your home forever, new and improved reverse mortgage products will allow you to tap that equity at some point along the road.
I've always been skeptical that retirees will have the personal discipline to reduce their spending later in ER. But the fact that there's broad-based statistical evidence of the occurrence of reduced spending leads me to believe that discipline isn't necessary. In fact, the lack of overall discipline may be leading to that reduced spending. Maybe the reduction in spending really is imposed by the inevitable consequences of undisciplined living-- the external forces of reduced mobility, declining health, and senility. Or maybe the excessive spenders were all victims of "survivor bias" and are now being supported by their offspring.
Either way there's more data than there used to be. It's not just anecdotal info being swapped at CFP conferences and surveyed in obscure research journals.
Note that none of the above really address the issues of long-term care and end-of-life medical spending. However Stern also points out the useful application of SPIAs and the utility of the hypothetical "solid LTC insurance policy".
But it's nice to see some numbers in popular media that can be plugged into a spreadsheet and used for practical discussions. "Well, honey, if you think you'll be happy to reduce our spending by at least 25% starting at age 75, then we can ER tomorrow. If you don't think that's likely then you should consider working for another five years."
It'd also be nice to see FIRECalc options for "reduced spending after age 65". Andy, perhaps you need to devote more effort to FIRECalc or find someone who has the programming skills to do so. Its relevance is at stake.
Personally I don't see spouse and me ramping up today's spending. Heck, for one reason or another our spending has already been dropping ever since we ER'd. However this later-in-life spending data can support a useful discussion of whether we still care to continue hedging longevity risk with equity risk. I've been trying to work up a post on that topic but it has a long way to go.