Aug 18, 2021

On the Head-Fake of Precision in Spend Rates in Retirement.

The impulse in the retirement finance lit I read seems to be to come up with mega-ultra numbers, the right answer, the unified field theory. I’m not sure that this can be done even though I took my own shot at it for a few years. The following post has exactly zero science so you can more or less blow it off. This piece is just an opinion. The images/charts are completely, entirely illustrative: not real; just trying to make a point.

If some new retiree wants to know what to spend at a given age for a given wealth level and some guess at a risk tolerance for certain capital market assumptions etc etc, what is the answer? Well, it depends. If, for example, I were to take three different methods of analysis (or more than three) – say MC sim fail rates, Lifetime Consumption Utility, and maybe Perfect Withdrawal Rates – and then get three (or more) people – with all their biases, errors, ways of seeing reality etc -- to write a program for each method and then run all of this for different parameterizations for risk or starting wealth or whatever, one would not get a convergence of answers. One would get a “cloud” of answers. All of these are probably “correct” in some superficially analytical way. Whether it is "true" in some essential way, I have no idea. If you do this discipline of ret-fin enough you can maybe see some sort of agreement but it’s never perfect, is it?

Here, let’s do a fake chart for some abstract level of wealth and shake up the different methods and programmers and parameter assumptions. It might look like figure 1. There is, of course, a center here (the line which is the mean of the dots) but what does that even mean? Is that line "right?" Idk, I think they, all the points, can all be right. (note, this kind of chart is a constant wealth thing, ie, if I had 1M and I start retirement at 60 or 70 or 80, "what is my spend rate" and not “what do I spend if my wealth runs from 1M to 100k between 60 and 80.” Get the difference?)

Figure 1. Fuzzy cloud of spend rates -- illustrative only

Does this fuzz-chart mean that we just “wing it?” Nah. Look, we are working here both within a fuzzy, analytically unclear "zone of spend" and we are also working within an ongoing process that is evolving over time, one that often depends on state info that will never, ever be predicted, especially as the horizon extends outward. This means we (ok “I”) put a premium on managing and monitoring the process, at least annually, maybe quarterly. Me? I do it monthly but then I am anal. My method is perhaps unorthodox (I use statistical process “continuous improvement” control techniques to watch and and then catch the process if it is edging out of bounds and then I correct quickly). On the other hand I don’t really sweat the details much anymore. If my process is "in bounds" (not illustrated in this post) I relax. Certainly I relax more than I did in 2012 when I freaked out on this stuff. If the rate is getting too close to the upper (or lower) bound, well then I am on the edge of my seat. This kind of thing can occur by way of lifestyle creep, random and unforeseen variation in spending (always to the upside, isn't it?), or more likely – because I am looking at a rate – from changes in portfolio value. I think this approach is pretty slick, but I will say I once had a reader vociferously disagree. Cool. We all have our methods. But the point is that I no longer perseverate too much on spend rates or certainly not on too many rate decimals. I perseverate, rather, on process control. That kind of process control thing is not in the lit too much but probably it should be...not least because everything is always changing: wealth, consumption needs, risk aversion, income, everything… 


  1. The so-called "right answer" is unknown and unknowable in advance.
    Every other answer is some form of approximation.
    Provided you can live with this - and you do not really have any choice in this matter - you will be all right. BTW, the logic above is also true before you quit working - it's just that a salary is usually a nice comfort blanket to have!

  2. I've read that the strongest lever in retirement is the decision on "when" where a significant number of people have limited control on that (terminations, layoffs, illness, caregiving for sick spouses etc)

  3. Yup, to borrow a phrase I believe originated in the US: in life shXt happens!