conservative vs flexible spending

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sb ooth2605
Posts: 2
Joined: Wed Feb 29, 2012 2:20 pm

conservative vs flexible spending

Post by sb ooth2605 » Wed Feb 29, 2012 2:26 pm

I was switching between conservative and flexible spending and found that the conservative spending had a lower percentage of funding in my later years than the flexible spending option. This seems counterintuitive. Is this an anomaly?

jimr
Posts: 557
Joined: Thu Feb 28, 2008 6:48 pm

Re: conservative vs flexible spending

Post by jimr » Wed Feb 29, 2012 4:55 pm

That does sound surprising, but it's tough to say what's happening without knowing all the inputs. Are there any inputs from the 'additional inputs' sheet, or are you only using the main sheet? The reason I ask is that irregular cash flows during retirement could explain part of it.


There are three outputs that might be interesting to compare with each type of spending policy 1) the probability of success, 2) the average shortfall percentage and 3) the avg ending portfolio value.

Also, it's interesting to look at the yearly detailed output to see on average what is happening with the plan and where the failures occur in each case.

Jim

sb ooth2605
Posts: 2
Joined: Wed Feb 29, 2012 2:20 pm

Re: conservative vs flexible spending

Post by sb ooth2605 » Wed Feb 29, 2012 9:08 pm

I'm adding ssi for me and my wife, rental income for 5 years, future sales of 2 properties ($105k and $240k) - 5 & 10 years out and 2 future increases in expenses 2 & 5 years out. I'm also setting minimum distributions at 70 and spending taxable, tax deferred and then tax free. Conservative setting adds about $400k to my ending median portfolio value but my % of expenses funded are less than 100% into my 80s, then ramps up to 100%. Flexible setting gives me over 100% of expenses funded from my mid 70s forward. I should be 100% funded throughout my lifespan in the conservative setting (I'm only spending 3-4% of my net worth/year from age 66 forward). In any case, it doesn't impact me one way or another but it was counter to what I thought should be occurring in the conservative setting.

Its a great tool. I've been retired for 2 years and although we spend less than we have allocated in the tool, it does seem to be a great predictor. I love the flexibility it gives me to play with future expenses and income.

Thanks!

jimr
Posts: 557
Joined: Thu Feb 28, 2008 6:48 pm

Re: conservative vs flexible spending

Post by jimr » Wed Feb 29, 2012 10:59 pm

ok. I see what's going on. For a base case, you probably ought to try the 'stable' spending policy. This forces withdrawal levels to the exact amount you specify.

The flexible spending model tries to give you some extra money to spend each year if things are going well, and than takes some away if things aren't going as well. It looks at the portfolio balance at the end of the year and makes an adjustment to the "percent of expenses funded". In good years, the percent is increased and in bad years the percent is decreased. With uneven cash flows, the planner can get tricked into thinking things are going really well and up the withdrawal percent in the early years, which will give you a buffer for later years when things are tighter

The conservative spending model looks at the portfolio balance, but never increases spending above 100% of what you specified. OTOH, it will reduce the amount you can spend if the portfolio isn't doing so well overall.

The reason flexible never gets as low as conservative is that with the uneven cash flows in your plan, the percent of spending variable builds up a 'buffer' in the early years and gets well above 100%. In the later years, when things may be a little tighter, the 'cutting back' done in the flexible model from 120% of spending down to say 110%, doesn't appear as drastic as the cuts in the conservative model from 100% of spending down to say 90%.

In any case, this is just a model for you to play around with. You can control the upper and lower percentage 'bounds' of the spending policies in the settings window. For example, you could set the maximum percent of spending to 100% in the flexible spending policy and see that it behaves exactly like the conservative policy (hopefully - it should!). Also, instead of setting a spending floor at 75% of planned expenses, you could set it at 95% of planned expenses. The idea of these 'spending policy' setting is to allow you to experiment with how adjusting your spending based on portfolio performance might change your plan's chance of success. OTOH, I think this type of tool works best when you don't take it too seriously. Just play around with all the knobs and controls to get a feel for what types of things make your plan stronger and what makes it less robust. ... And keep asking quesions.

Hope that helps,

Jim

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