Dynamic Spending Models

[InsertCleverHandle]

Has anyone used a dynamic spending model in retirement? For example setting a base spending and then adjusting discretionary spending each year depending on market returns of the previous year? Conceptually I like this model because it allows to adjust up or down depending on the market, which seems to be human nature (even if not an intentional plan). It also allows to coincide large purchases following a good year (take the safari on a good year, and a camping trip on bad year). If you have experimented with this, how did you do it, and what lessons did you learn? I’m particularly interested in those for those who retired early with a 40+ year retirement to plan for. Thanks.

 

[OldShooter]

I know people do it, but that seems to me a little like the tail wagging the dog. We modify our spending based on guessing the market status; spend from equities when the market is up, spend from FI when equities are down, but maintain faith in the overall upward trend of the market. December will end my 20th year of retirement and this approach seems to be working out.

IMO planning an AA and spending strategy to minimize SORR is more important than worrying about recent market returns.

 

[audreyh1]

Yes - I use a simple fixed % of the Dec 31 value of the portfolio each year for the Jan annual withdrawal. Have done this since I started withdrawals. This method can be modeled with FIREcalc and is called % of remaining portfolio. I was never comfortable with inflation adjusting withdrawals, preferring to react to changes in the portfolio value instead. I’m very comfortable with it and like the simplicity.

A popular variable model is the VPW method which is a bit more elaborate and probably does a better job of spending down over a given period of time. Several people here use that method. https://www.bogleheads.org/wiki/Var...W) is,and portfolio returns during retirement.

Yes, I retired with 40+ years expected. 23 years retired so far.

A note: in our case despite nasty bear markets our portfolio has grown enough such that our spending can’t seem to keep up with the withdrawals, even after reduced income after a bad market year. We have excess accumulated and increase gifting etc. when it seems appropriate. I think we’ve been lucky in terms of sequences, low withdrawal rate, or things like the pandemic reducing our discretionary spend for a few years. Knock on wood!

 

[FLSUnFIRE]

I don't think too many spend based off of a formula. My spending is dynamic just from psychology. If the market is down, I don't feel "rich" and spend less, if up I feel "rich" and spend a bit more (at least I think I will... hopefully I'll test the later in the coming years!). Right now my withdrawals are being heavily influenced by optimizing MAGI for ACA which keeps me lean. I probably have one more aggressive year and then will have to increase my income to ensure enough cash on hand and once I start my SEPP I'll be locked into a higher withdrawal rate. I have a feeling having more cash on hand will make increasing spending easier regardless of the market as the SEPP withdrawal will happen either way (although I could reinvest in my taxable account).

 

[mpeirce]

We've been using a simple variable withdraw approach.

To determine our target spending for the current year we look at our net worth (minus our house, so basically our financial net worth) for the last three years and take a simple average. Then we multiply this by a fix percentage (we use 4.5%) and use that to guide our yearly budget.

Our budget isn't finely detailed. It's only got a couple of broad categories like insurance, taxes, travel, and so on.

This keeps things simple and by using the moving average it retards spending increases when markets go up and slows down the cut backs when things tank.

We've found that about half of our spending is discretionary at this point. It's pretty easy to cut back on travel expenses if we need to put a lid on spending. Or conversely, BTD on more expensive options when the market smiles on us.

Our experience has been that most years we don't spend our allocation, but there have been a few years were we've gone over.

We developed this before even finding this forum or learning about the "4% rule". It's roughly modeled after the "endowment model" of spending.

 

[clobber]

fi.calc is a good tool for modeling quite a few withdrawal strategies

 

[COcheesehead]

fi.calc is a good tool for modeling quite a few withdrawal strategies

And they explain each one too.

 

[levindb]

We use a very different approach that incorporates market performance,

1. We know our total of investable assets at the end of the year.
2. We know our SSA benefit in today's dollars for the coming year.
3. We assume our ROI will be 3% above inflation.

Based on the above, we can calculate how much we can spend, on average, each year until we die at age 105...Die With Zero concept. (I understand that we may not live that long)

That creates our MAX SPEND per year. We then budget for about 70% of that number, and will occasionally have BTD expenses that will use up some/all of that extra 30% that we were not planning to spend. Past market performance is built into #1 above.

It works for us as there is a lot of wiggle room to deal with the unexpected.

 

[audreyh1]

Ability to be flexible is key!

 

[Dash man]

I monitor our net worth on a spreadsheet that updates equity prices automatically, and updating fixed income and bank accounts is easy. As long as our investments plus cash trend up, I don’t watch our spending too much.
This year will be expensive with getting solar on our primary home and a new roof and siding on our Jersey Shore home, but overall our investments will still be up (at least so far) more than our spending.

 

[RunningBum]

I use VPW, as mentioned above. I retired at 49, 12 years ago, though I didn't start using VPW until 53. I'm a little more conservative with my %spending allowance than the Bogleheads VPW plan, but I still under-spend. It's not on purpose, at least not now, but my nest egg has grown quite a bit in retirement.

I like it because if we have a long downturn, I allocate less for spending right away. I struggled with the 4%+inflation plan because that plan relies on recovery after downturns to let you keep spending at that rate. If bad times continue at some point you'd have to cut spending, probably by a lot. VPW has you cut spending right away you won't have to decide if and when to make drastic cuts.

As far as big ticket items, I suppose if I didn't have my buffer I'd hold off during and after down years. That certainly fits in with VPW, though if the previous year had high returns (giving you more to spend) but the current year there are market losses, you have to decide if you allow yourself those luxuries VPW allows, or do you hold off because you know your balance is already going to be lower.

Regarding SORR, that is usually addressed by your asset allocation, independent of spending amount.

 

[TheWizard]

I'm fortunate to have more than enough retirement income without relying on portfolio withdrawals, especially after starting SS at age 70.
I typically put a few thousand dollars per month of excess income into my taxable investment account after paying all bills and topping up my checking account to my target level.

So, no, I don't use any particular spending model to decide what to spend money on or how much.
The voices in my head tell me that.
It helps that I'm not a particularly extravagant spender in some ways...

 

[flyingaway]

Your spending can be dynamic. But if the roof is leaking, you have to replace it.

 

[NW-Bound]

Your spending can be dynamic. But if the roof is leaking, you have to replace it.

That seems to be the dynamic part of my spending.

Seriously, my spending varies so much from year to year, though I do keep track to make sure the trend is not creeping up and up.

Some years I incurred some one-time expenses, or took a long vacation, or helped my children with their house purchase. It's always something. I don't see how to plan for it, except to underspend and keep the unspent surplus as reserve.

Still, my expenses went down overall, while the market god has been generous. At this point, I am not worried about unexpected expenses anymore.

 

[deserat]

I plan on using VPW with the suggested amount being the max ceiling. I will have several pension income streams that come on in a time staggered fashion over a decade. VPW uses those and the portfolio to determine available amounts for spending. The guy who helped develop the spreadsheet has a long thread at the Bogkehead site testing the approach over many years using a portfolio and the actual results over time. There are a few posters over there who suggest the method is too risky, however, I see the suggested amount as just that, a suggestion. Nevertheless, it is based on how your portfolio performs and as a commenter said above, using that model monthly, you will be adjusting very quickly to market conditions.

The caveat to this approach is that at age 80, one buys an annuity that covers their basic living costs. If you have a pension that does that, then you can theoretically ride it out until the portfolio is depleted. That's another boundary condition: portfolio depletion at end of period of interest. You could pick 30-40 years at age 60 and pretty much cover most bases.

I like the model because it is quite simple and he built an easy spreadsheet to use. And it's free .

There is a site called ficalc and he has available several other models of drawdown philosophies. I've found in my case they are all fairly similar with regard to the final annual spend, so, my goal now is simplicity of execution as while I sort of like managing my finances, I am not as obsessive as I was before.

 

[RunningBum]

That seems to be the dynamic part of my spending.

Seriously, my spending varies so much from year to year, though I do keep track to make sure the trend is not creeping up and up.

That's actually another plus of VPW. Market returns and actual spending go hand in hand with your spending allowance for the next year. Market returns over your spending rate for the year and spending less allow for more spending the next year. Conversely, poorer returns and overspending means you'll have a smaller allowance. The combination can offset each other to keep your spending static or only slightly changed.

 

[marko]

It also allows to coincide large purchases following a good year (take the safari on a good year, and a camping trip on bad year). .

I don't play that game but I believe that spending based upon just a good/bad year is just too short a time frame. I would use three year averages for such thinking. Way to much volatility year over year IMO.

 

[NW-Bound]

That's actually another plus of VPW. Market returns and actual spending go hand in hand with your spending allowance for the next year. Market returns over your spending rate for the year and spending less allow for more spending the next year. Conversely, poorer returns and overspending means you'll have a smaller allowance. The combination can offset each other to keep your spending static or only slightly changed.

I read of VPW, but never bothered to find out the details. My seat-of-the-pants method works so far, and it's good enough.

Maybe I could spend more than I have done, but I don't feel deprived, so it's all OK.

 

[11522914]

I read of VPW, but never bothered to find out the details. My seat-of-the-pants method works so far, and it's good enough.



Maybe I could spend more than I have done, but I don't feel deprived, so it's all OK.

Lol. I've never known what to call my method.

Seat-of-the-Pants Method works for me too.