Interested to hear what people are using as their "most preferred" spending strategy when running an analysis in PRC. I realize this chat could get out of control so please keep responses as succinct and specific as possible.
- Which spend strategy do you use when running an analysis?
- What is the main reason you use this strategy?
- What would be (is) your second preferred strategy?
- Does your primary strategy reflect a personal spending goal or is it more based on future market conditions? Or both?
- If you do consumption smoothing, do you assume assets are correlated or no?
I use "Use Specified Expenses Only". I use tax brackets (12% - 15% which is more then enough based on our present standard of living) to limit our spending. I think the future is to unknowable to use other than historical ROR, inflation, etc. If something weird happens in the future we will adjust our spending based on the weird event(s), but not until that time. I am not sure that answers your questions??
@giovanelli766 Pizza - this is really just to get a sense for what people are thinking and doing with PRC (not as questions), thus the word "Poll" Thanks for sharing!
I have only used the "Use Specified Expenses Only" strategy. I do this because I think I have a pretty good estimate of my non-discretionary expenses and I have guaranteed income sources that more than covers them once they are all turned on. My portfolio is used to cover my fun expenses, large unexpected expenses and possible legacy if I have any left over.
I would be interested to hear from those that do use the other strategies and possible advantages.
I've been using Specified Expenses with Smoothing (I turn off correlated assets and use Monte Carlo analysis). Not sure its the optimal strategy but based on my limited knowledge it seemed most likely to provide a "real world" conservative estimate. Open to hearing what other people use and why
@golich428 What would be the rationale for NOT using Specified expenses with smoothing? Isn't that supposed to factor in potential market swings and this give you a "safer" projection and amount to spend?
@giovanelli766 What would be the rationale for NOT using Specified expenses with smoothing? Isn't that supposed to factor in potential market swings and this give you a "safer" projection and amount to spend?
@nc-cpl Well to be honest I never really looked at the smoothing option. At your question I dove head first into it for the first time 🧐 My results using fixed rate and historical were both about plus $45,000 and negative about ($7,500) using Monte Carlo. That's a big difference 😲 which may get us back into the debate about historical results vs Monte Carlo analysis (you want to do that again? 🤓). At our present standard of living spend rate (plus taking even more out of retirement accounts to get us to the top of the 12%-15% tax bracket) we have more than enough money even with a not so great stock market return over the next 8 or so years before we both are on Medicare and then social security after that (we have no kids so no legacy saving needs). So the additional detail that smoothing may give us doesn't add much to our planning. Yes we are fortunate but we also starting using PRC many years ago to help us get comfortable about were we find our-self's now 😀.
@giovanelli766 My understanding is smoothing has more value for those who still have time left while in the active earning and saving phase, pre-retirement. Maybe less value for those on the verge of or already in retirement. Maybe Stuart will weigh in on it.
@nc-cpl I would agree that consumption smoothing is most useful for people with quite a bit of fluctuation in their future spending, such as mortgages, college educations, etc; however, I'm retired and like to use it as a measure of the amount of margin in my plan. In other words, I specifically define all of my expenses and then do consumption smoothing with the Monte Carlo method to see about how margin there is in my plan, where the computed NSDS value is the margin with a 90% probability of me not outliving my money.
Stuart
@smatthews51 Good to know. We're on the verge of retiring and I've been using it in a manner very similar to yours. The only wrinkle I encounter is it tends to want to preserve (probably based on the 90%+ goal) an unnecessarily large $ amount of assets at end of life. Is this common? Way more than we want to leave behind, even with generous charitable QCD's included. Under this outcome, I experiment with dialing up" the NSDS amount (manually overriding it to a higher amount) to A) see how much more we could spend in retirement, while B) simultaneously reducing the residual EOL amount. The trick is not going too high or that 90% starts go lower fast. Does this seem a reasonable way to be "viewing and shaping" the analysis?
Non-specific discretionary spending
I typically stick to specified expenses only, because that's what clients have given me and I want to see if their retirement will work with those numbers.
However, if the analysis shows they're being too conservative (100% or so success), I like to tell them they can have more fun. So we set the expenses to include smoothing and run the smoothing tool to see how much more they can spend annually and stay at or above 90%. Often, we'll jump into Decompose to spread that money around (more vacations!). That makes them happy 🙂 I emphasize to not blow it all early in the year, so we can course-correct if things don't go as planned.
As well, if they have a set, preferred retirement date or age, and the analysis shows it ain't happening, we use this to look for places to cut back and make decisions, along with the 'when can i safely retire' tool and 'how much do I need to make part-time' tool.
What an amazing product for retirement planners like me, and others who want to do more than just wing the 4% rule!
