How Much Can Clients Spend in Retirement? A Test of the Two Most Prominent Approaches


In my last article, I described research-based innovations for variable withdrawal strategies from retirement portfolios. In this article, I put Jonathan Guyton’s decision rules and David Blanchett’s simplified withdrawal formula to the test. I simulate the income and remaining wealth generated with these two strategies using different underlying Monte Carlo assumptions. These results provide planners with a better understanding about the potential spending paths generated by these different approaches, and they also suggest where further improvements can be made with regard to designing variable retirement withdrawal strategies.

Brief overview of the spending strategies

My last article explained two of the key research-based variable retirement withdrawal frameworks: Jonathan Guyton’s and Dave Blanchett’s. Here’s a brief refresher.

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Guyton’s decision rules have been popular with advisors for the past 10 years, providing a guide for increasing initial retirement spending on the condition that future spending may not always increase with inflation and may need to be cut when markets underperform. He proposed three decision rules:

  • Withdrawal rule, which increases withdrawals for inflation if the portfolio experienced a positive total return in the previous year.
  • Capital preservation rule, which reduces real spending by 10% if the year’s current withdrawal rate grows 20% above its initial level.
  • Prosperity rule, which increases real spending by 10% if the current withdrawal rate fell by at least 20% below its initial level.

Though it will not be part of my simulations, he also included a portfolio management rule, which focuses on how the investment portfolio is drawn down and rebalanced between different assets.

The second framework I simulate has a long lineage culminating in Blanchett’s development of a simple formula to update sustainable withdrawal rates on a year-by-year basis, which he described in a September 2013 Journal of Financial Planning article. Whereas Guyton’s decision rules generally call for inflation-adjusted spending to continue unless certain conditions are met, Blanchett’s formula provides a new withdrawal rate to use with remaining financial assets for each year of retirement. This creates a more volatile spending path. Advisors input four variables to determine an optimal withdrawal rate for each year of retirement: asset allocation, the remaining retirement time horizon, the targeted probability of success and an alpha term that reflects portfolio over- or underperformance relative to the built-in capital market expectations.

As this is a dynamic withdrawal model, Blanchett found that the optimal retirement horizon is the client’s median remaining life expectancy plus two years, and the optimal target probability of success is 80%. These parameters, when combined with the client’s asset allocation and capital-market expectations, provide a unique sustainable withdrawal rate for each year of retirement.

See full article on How Much Can Clients Spend in Retirement? A Test of the Two Most Prominent Approaches by Wade Pfau, Advisor Perspectives

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