Part 2: Thoughts on constant spending in my spend-game context

This is a follow-on to part 1.  That means I'll be a little too brief with descriptions and you'll have to go back and check the previous post for background.  In short, we have been looking at the simple/basic effects of constant spend assumptions on residual wealth and forward-estimated fail risk that is dynamically recalculated each step (year) of the game.   The difference here is that this post will look at: a) only 3% spend rate because it looked so sober and safe, and b) what happens to wealth and risk if we were to have a less-sanguine-than-5.7% return assumption.  In this case we try 5% and 4.5% in addition to the original 5.7.  That 5.7 number is an artifact of an old post where we picked it for a reason that made sense in that post.  It has persisted through these analyses because I was too lazy to change it.




1. The PV of consumption.  Nothing changes here except that for the 4.5% return assumption the plan dies three years before 105. The other two survive but I truncate the path to remind myself there is a plan fail at 102 for at least one return assumption.  The dotted lines are the consumption paths for constant-risk spending and can be mostly ignored.

2. PV of residual wealth for different return assumptions. Dotted lines as above.

3. Dynamic estimates of fail risk. Fail risk is recalculated each period using new inputs for age, portfolio and spend.  This is done for a 5.7%, 5%, and 4.5% return assumption.  Spending was inflated at 3% by the way.  The previous post's 3.5% and 4% constant spend is left in for context as were the two dotted lined representing a constant-risk version of spending

Comments:

• 3% constant spend still looks mostly pretty safe and sober.  Or at least it is if you think your returns are going to be consistently higher than 4 1/2% and/or if you don't have any superannuation risk in your plan or if you plan to annutize whey "they" say you are supposed to.
• A 4% constant spending path with low returns would be scary as would even 3.5.
• Sensitivity (in terms of the response of the fail estimates) to returns seems pretty high especially at late ages and lower rates.  The joint sensitivity to base spend assumptions and return assumptions combined has to be intense especially as the constant spend rate gets higher and return assumptions get lower.  That's probably something to explore to get a decent visualization.