Suggestion for a new spending policy

A retirement planning tool is only as good as its assumptions and inputs. Share your thoughts or ask questions about the internals of the simulation, built in planner assumptions, or planner inputs.
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palgup
Posts: 5
Joined: Wed Sep 23, 2015 4:21 pm

Suggestion for a new spending policy

Post by palgup »

Jim, this is a fantastic tool. I’ve been playing with the downloadable version for several months. It’s the best retirement tool I’ve found. I have figured out how to model every real life situation that I will face (rising and falling expenses, social security, pensions, inheritance, etc.). The one reality that I cannot overcome is spending policy rules.

I’d like to make one suggestion that would make this tool close to perfect for me.

Let me start by saying my retirement objective is to strike a reasonable balance between A) not running out of $ before death and B) not being so conservative that I end up with a ton of $ in my portfolio when I die at a (hopefully) late age. I believe that an additional spending policy would be extremely helpful to achieving this balance.

I love the concept of the flexible spending policy – cutting back on spending when times are lean. But the criteria that these policies use to determine when times are lean are not applicable to my situation. They reduce spending when 1) the portfolio declines in value and 2) the value of the portfolio is lower than it was at the start of retirement. For me, those two criteria will likely be met every year in retirement. So the simulation evaluates every year as being lean, when in reality many (most?) of these years are right on track or better.

I do not want to die with more $ in my portfolio than I have when I retire. So the 2nd criterion for determining a lean year is actually an objective for me. And I do expect my portfolio value will (almost) always be lower at the end of a year than it was at the beginning. When I use the flexible or conservative policy in my situation, I quickly only fund my minimum % amount – usually at about 14 years into retirement. So those policies aren't really flexible at all - they just work to stabilize me at funding 85% of my planned expenses.

For me, a more realistic condition for determining a lean year is when the annual real return calculated by the tool is less than what I am expecting (the number I input for average return minus the number I input for average inflation). For example, assume I input 2% average inflation rate and 6% average return rate. Any year when the simulation spits out a real return of less than 4% would result in a lean year and would prompt spending cuts the following year. Perhaps spending the next year would equal planned expenses times the value I input for “minimum % of expenses to fund” on the settings window. It’s not perfect, but it’s more realistic for me than the other policies.

I realize that what I’m asking for is probably a ton of work. So I’m not expecting that you’ll want to do this. Just thought I’d ask.
Thanks for this great tool.

jimr
Posts: 577
Joined: Thu Feb 28, 2008 6:48 pm

Re: Suggestion for a new spending policy

Post by jimr »

This is an interesting idea and it might not be too tough to implement.

I worry about a spending policy that imposes big cuts very suddenly, but perhaps it's ok if the last 10-20% of spending is truly discretionary and could be cut on short notice.

May I ask what values you are using for average return, std deviation, and inflation?

palgup
Posts: 5
Joined: Wed Sep 23, 2015 4:21 pm

Re: Suggestion for a new spending policy

Post by palgup »

Thanks Jim. 15% of my spending is completely discretionary, which is how I came up with the 85% for minimum spending to fund.

I tend to do a lot of "what-if" types of simulations. So I can be all over the board. But the values I use most often are:

inflation = 2.2% infl std dev = 0
ave return = 6.3%
std dev = 7.9%

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