Another spending rule article - interesting idea

[babysteps]

Latest Financial Analysts Journal has an article "The Only Spending Rule Article You Will Ever Need" - how's that for a title?

Long (very detailed) story short, take the total $ amount of your invested assets and look at what an immediate pay annuity costing that much would pay you this year.  That's what you can spend (don't actually buy the annuity).  "Investors who behave in this way will experience consumption that fluctuates with asset values, but they can never run out of money."

full article http://www.cfapubs.org/doi/pdf/10.2469/faj.v71.n1.2?src=recsys
summary http://www.cfapubs.org/doi/sum/10.2469/faj.v71.n1.2?src=recsys

[arebelspy]

Meh.  Tying your spending to those rates (often tied to long term treasury rates) will have you working a lot longer than necessary, IMO.  And fluctuating your income that much may be unnecessary.

I prefer finding what you need/want to spend, then finding the portfolio that supports that at a failure rate you're comfortable with via cfiresim.com to see how it would have done historically (and think that the future won't necessarily be drastically worse than the worst past period) rather than arbitrarily tying your spending to what rates are today and what your invested assets are.

What if I have 5MM and a SPIA would get me 300k annually.  Do I need to spend that much?  Of course not.

Tying your spending to what your portfolio could output is the tail wagging the dog.  Determine your spending first, then see what portfolio is needed to support that.

[Retired To Win]

Latest Financial Analysts Journal has an article "The Only Spending Rule Article You Will Ever Need" - how's that for a title?

Long (very detailed) story short, take the total $ amount of your invested assets and look at what an immediate pay annuity costing that much would pay you this year.  That's what you can spend (don't actually buy the annuity).  "Investors who behave in this way will experience consumption that fluctuates with asset values, but they can never run out of money."

The outcome and the process there sound very similar to how the IRS calculates what your annual "required minimum distribution" from your IRA has to be.  Except the IRS factors in life expectancy, while the annuity's payout rate is doing that indirectly.

But, I agree with Arebelspy.  Figure it out from the bottom up, based on your (mustachian) living expenses.

[babysteps]

But, I agree with Arebelspy.  Figure it out from the bottom up, based on your (mustachian) living expenses.

Me too.

But if someone (possibly new to MMM) has a big pile already and wants to know, 'can I retire now?', this could tell them.  Could be especially helpful if one spouse is ready to RE and the other one thinks brokerage rules-of-thumb on spending & savings (hint: imo they always inflate both so they can convince you to pay them more) apply to them.

Better title for the article would be "The only withdrawal rule article you will ever need".

[Gone Fishing]

Would probably work fine. As others have said, probably a bit conservative, but that would depend heavily on asset allocation.  Using this method basically allows you to tap into all the actuarial knowledge of a large insurance company without having to spend anything to do it. Fact is, MOST people have to curtail their spending to some degree in retirement as they have insufficient savings to support their working lifestyle. 

[brooklynguy]

Agree that this method is too conservative for my taste (and, if relied on, will result in working longer than necessary), but it's not a bad tool for the very risk-averse retiree to have in their arsenal to incorporate into a variable rate spending plan.

The article proposes using the hypothetical annuity payout as a cap on each year's spending; nothing requires you to spend up to that amount if your spending would otherwise be less.  Someone could use this as part of a plan to spend, for example, no more in any given year than the lowest of (i) the amount dictated by the 4% rule, (ii) the amount dictated by this article's method and (iii) the amount they would naturally spend in the absence of any spending rules.

Again, too conservative for my taste, but to each their own.