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Wonky comparison of various Retirement Spending Strategies (for financial independence folks as well)

This is for the data wonks who are interested to read how various theoretical retirement spending strategies are tested over fixed Monte Carlo simulations. Mr Wade Pfau did an interesting paper that compares the various spending strategies out there. These includes 4% constant inflation adjusted, constant percentage spending, Zolt and Guyton decision rules, Annuity and Actuarial methods.

The paper link here.

Mr Pfau provides a framework how to try our best to compare these strategies for a retirement spending needs.

  1. Discussions of different strategies are usually based on different market assumptions, which makes comparisons between them more difficult.
  2. The traditional “failure rate” measure (which indicates when the financial portfolio is depleted) shouldn’t be used with variable strategies because the spending level for different strategies might be quite different in the period leading up to failure, and because failure is technically impossible for some variable strategies.
  3. We need to be able to keep track of upside spending potential with different strategies, while also finding a way to calibrate the downside risks that a retiree is willing to accept
  4. Individuals with greater risk capacity (either because they are more flexible with spending or because they have more secured income sources from outside their portfolio) may be willing to allow more downside risk to spending for the hope of obtaining greater upside potential
  5. Different strategies will imply different spending patterns over retirement, either because those patterns are pre-programmed into the strategy or because the the way that spending and portfolio returns interact

The results are interesting in that the initial first year spending % of your Wealth Fund /Wealth Machine/ Portfolio is adjusted so that they can fit the failure rate. He also show the real spending in 10 years, 20 years, 30 years.

And if the failure rate for year 30 is reduced to $510, for retirees who is able to take it (because they have government pension system or other sources to depend upon):

Interesting stuff.

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