How can you get comfortable with uncertainty about retirement income?

1. Retired? Spend More (Pt. 2)
Submitted by Larry Frank Sr. on Wednesday, November 5, 2014 - 3:00pm
How can you get comfortable with uncertainty about retirement
income? Establish a prudent figure for the coming 12 months, pre-set
your possible decisions for market dips and update your plan
annually. Your plan may even contradict what you thought you
knew about spending in the golden years.
Our first article looked at formulas for calculating retirement
income, many of which hinge on such assumptions as your age
when you die. Many formulas also pick an arbitrary “old” age like
95. What’s the real likelihood that you will live to, or for that
matter outlive, 95?
Using such factors as an unrealistically old age, ultra-conservative
planning applications can leave a lot of your spendable money
basically in reserve during your retired life. The reason: fear of
your outliving your cash.
As you the retiree age, your withdrawal rate from your
investments can actually increase a little because your remaining
lifetime grows shorter. Couples planning together for post-work
years can use both longevities to derive a joint expected age to
bookend the distribution period.
Some retirement-income planning methods seem flawed. Nothing
in the Safe Withdrawal Rate (SWR) method, a very conservative
approach to determine your initial retirement income, suggests
when or how to adjust withdrawal rates for later and shorter time
frames as you age.
A number of planners also distrust Monte Carlo analysis, which
runs several theoretical simulations using many different financial
variables, possibly because planners recognize how much
withdrawal rates may vary and that Monte Carlo may not measure
those rates consistently.

2. We prefer to establish some set of standards to set benchmarks
and simulation time frames, which helps distinguish one
withdrawal rate from another based on the percentage of
simulations that fail (i.e., you run out of money while still alive). If
retired, you can also use your present withdrawal rate and lifetime
remaining to evaluate the percentage of simulations that fail – and
signal to how close you are to running out of money before your
death.
Your retirement income is not set-and-forget unless you have only
fixed Social Security benefits or pension income and no income-producing
portfolio. Any amount of financial assets requires an
annual review to determine your wisest withdrawal rate given new
facts and circumstances.
Two popular methods exist for you to consider. The SWR method
assumes that you don’t want to adjust your spending during
retirement. It makes overly conservative assumptions and leaves
money on the table just in case.
If you don’t want to squirrel away that much cash, though, a
method called dynamic updating planning recognizes the value of
prudently spending money while you can. This uses simulated
annual reviews based on longevity tables and adjusts each
subsequent simulation for your aging one year.
Dynamic updating also factors in such important characteristics as
projected market behavior and how long you’ll need to make
withdrawals. If most of your income stems from Social Security or
a pension, you will likely need to adjust marginal spending.
At least you’ll know your golden years won’t mean always pinching
pennies.
Follow AdviceIQ on Twitter at @adviceiq.
Larry R. Frank Sr., CFP, is a Registered Investment Adviser
(California) in Roseville, Calif. He is the author of the book, Wealth
Odyssey. He has an MBA with a finance concentration and B.S.
cum laude in physics with which he views the world of money
dynamically. He has peer-reviewed research published in
the Journal of Financial Planning.
http://blog.betterfinancialeducation.com/.
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Tag:
Retirement Planning
Asset Allocation
Spending