A Comparison of Variable Spending Strategies, Ep # 297

If you have found this podcast you’re probably interested in spending more money, spending less in taxes, and making life even better in retirement.

On this episode of Retirement Starts Today, we’re taking a look at how to spend more money in retirement by assessing a two-part article from AdvisorPerspectives.com called A Framework for Assessing Variable Spending Strategies.

If you are trying to figure out how to maintain your desired standard of living throughout retirement, you won’t want to miss hearing the authors’ findings. Press play to listen.

Outline of This Episode

[1:28] A variable spending strategy is better than a fixed withdrawal strategy
[6:40] Different types of spending strategies
[8:35] My thoughts
[11:45] How employee stock option plans work

In retirement, variable spending strategies are more flexible than a fixed withdrawal rate

In this two-part series, Wade Pfau and Steve Vernon explore variable spending strategies, their benefits, and how to assess their effectiveness

The articles address several key questions regarding retirement planning: namely, how to ensure that retirees have enough savings to maintain their desired standard of living throughout their retirement. The articles argue that the traditional approach of using a fixed withdrawal rate from a portfolio may not be sufficient to address the challenges of modern retirement planning.

The traditional approach to retirement using a fixed withdrawal rate doesn’t address retirees’ needs in a shifting economic environment. This is why the authors (and I) propose using a variable spending strategy. I call this approach using guardrails.

The idea is that by adjusting spending habits based on market conditions your nest egg will last longer.

The components of a variable spending strategy

There are 4 main components of a variable spending strategy

A spending rule is a formula that determines the amount of spending allowed each year.
An investment strategy is an approach used to invest the portfolio to support the spending rule.
A monitoring and adjustment process involves periodically reviewing and adjusting the spending rule and investment strategy as needed.
A floor and ceiling mechanism is a set of rules that determine the minimum and maximum amounts that can be spent each year.

My thoughts on the article

I agree that traditional retirement planning approaches may not be sufficient to address the challenges of modern retirement planning. The use of variable spending strategies that adjust spending based on market conditions helps retirees maintain their desired standard of living throughout their retirement.

The 4% rule is great for back-of-napkin retirement planning but it doesn’t mesh well with human nature. A floor and ceiling spending strategy may be the most effective in many market conditions and can provide a higher probability of success than a constant inflation-adjusted spending strategy.

If you missed the previous episodes, make sure to go back and have a listen. Bret and I gained so much insight with our client estate planning reviews and we enjoyed bringing those insights to all of our listeners.