In a post last week I showed that for the majority of retirees the standard recommended spending model in retirement does not match reality. Spending in retirement actually grows by less than inflation over time. In this post I want to show you how using a more realistic sending model impacts how much you can withdraw from your portfolio in retirement.
If we go back and use the same model we used to calculate SWRs, we can adjust annual spending to see the impact of using a more realistic spending model on SWRs. For this post I simply changed the annual spending adjustment in retirement to grow by 1% less than inflation during the 30 year retirement periods (-1% per year real spending). This is actually pretty conservative compared to the actual retiree data.
Second, I took at look at combining a realistic spending model with a flexible spending model I’ve discussed in the past. The Floor Ceiling method basically allows spending adjustments in retirement based on the performance of the portfolio. For this post I used a floor ceiling model with unlimited upside and a max floor of -10% to inflation adjusted spending.
The results are shown in the table below for 30 year retirement periods, a 70-30 SP500 10yr UST bond stock portfolio with data going back to 1929.
The standard retirement model says your SWR is 4.39% for this portfolio. By simply using a more realistic spending model the SWR for the portfolio goes up to 4.90% an increase of almost 12%. The FCM model with its flexible spending says your SWR is 4.84% for this portfolio. By combining both approaches the SWR for the portfolio goes up to 5.39%, an increase of over 22%! That’s a raise of 22% per year in retirement simply by being more realistic and flexible. Very powerful stuff.
For those still building for retirement the implications are perhaps even more impactful. The percentage increases in SWR are equivalent to a reduction in the amount you need to fund your retirement. If you can spend 22% more with these models in retirement it also means you would need 22% less to retire. That could translate into several years of work or no work in this case.
Full Disclaimer - Nothing on this site should ever be considered advice, research or the invitation to buy or sell securities. These are my personal opinions only.