Spending policies

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cobson
Posts: 7
Joined: Fri Jul 28, 2017 5:52 am

Spending policies

Post by cobson »

I’m trying to understand how the conservative spending policy works. The documentation says “Basically, in any year where the portfolio shrinks and the portfolio balance is smaller than it was at the start of retirement, this policy withholds the cost of living increase (cola) for that year”. So for this to happen, growth must be negative in the previous year AND the portfolio value must be lower than the starting value ? it’s the second part of this that confuses me. Is it the actual dollar value or the inflation adjusted value that must be lower ? If someone were trying to follow this policy in real life, would they have to try and calculate the inflation adjusted value of their current portfolio in terms of the year in which they retired in order to make the comparison ?

As I understand it the Guyton-Klinger rule only withholds the cola rise when the previous years growth was negative, without requiring the current and initial portfolio values to be compared, which seems easier to follow in real life. Would it be possible to implement a Guyton-Klinger spending policy in the software ?

Thanks.

jimr
Posts: 600
Joined: Thu Feb 28, 2008 6:48 pm

Re: Spending policies

Post by jimr »

cobson wrote:Is it the actual dollar value or the inflation adjusted value that must be lower ?
The inflation adjusted value must be lower.
If someone were trying to follow this policy in real life, would they have to try and calculate the inflation adjusted value of their current portfolio in terms of the year in which they retired in order to make the comparison ?
Technically, yes. However, the planner's implementation of spending policies actually makes the planner's results slightly more pessimistic compared to a model that uses the Guyton-Klinger spending rule.

So in real life, a retiree could simply skip the portfolio comparison step and implement the Guyton-Klinger approach, which make their approach slightly more robust (and theoretically safer) compared to the approach that the planner modeled.

As an aside, when I was testing the algorithm, the extra portfolio value check didn't make a very big difference in the planner's results compared to the check not being in there (IIRC, it made just a percent or so difference in prob. of success). If I had it to do again, maybe I'd skip that extra step, but since the planner has been around so long I'm hesitant to make a chance at this stage.

Jim

cobson
Posts: 7
Joined: Fri Jul 28, 2017 5:52 am

Re: Spending policies

Post by cobson »

It would be great if you could be persuaded to add some extra spending policies (such as GK) along the same lines as the ones in the cFireSim tool, as your software is much nicer to use in other respects. The existing conservative and flexible policies could be left as they are.

jimr
Posts: 600
Joined: Thu Feb 28, 2008 6:48 pm

Re: Spending policies

Post by jimr »

Thanks for the suggestion and I will take a look at those additional approaches. - Jim

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

Re: Spending policies

Post by palgup »

I agree that additional spending policies would be very helpful. I find the conservative and flexible policies completely useless because I want to draw down my portfolio balance every year, which kicks in the trigger to save more $, even though my portfolio balance may actually be in better shape than I was planning on. I can't be the only one who doesn't want to die a richer man than the day I retired. So I'm stuck with the stable policy even though in real life I will always evaluate yearly and adjust my withdrawals accordingly.

jimr
Posts: 600
Joined: Thu Feb 28, 2008 6:48 pm

Re: Spending policies

Post by jimr »

palgup wrote:I agree that additional spending policies would be very helpful. I find the conservative and flexible policies completely useless because I want to draw down my portfolio balance every year, which kicks in the trigger to save more $, even though my portfolio balance may actually be in better shape than I was planning on. I can't be the only one who doesn't want to die a richer man than the day I retired. So I'm stuck with the stable policy even though in real life I will always evaluate yearly and adjust my withdrawals accordingly.
Before you give up completely on the flexible spending policy, you might want to take a look at the spending policy parameters in settings. Keep in mind that the flexible spending policy has the built in assumption that you'll cut back if the plan isn't doing too well AND that you'll spend more if the plan is doing great.

If you have a solid plan with the default parameters, try setting the spending policy multiplier to something like 5 or 10. The multiplier allows the spending policy to act faster, both to cut back spending when things aren't going well and to allow extra spending when things are going great.

To see how this impacts spending from year to year, check out the detailed view 'Percent of Expenses To Fund' column.

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

Re: Spending policies

Post by palgup »

Thanks for the quick reply Jim. I'll try that.

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