11 Divvying Up Your Nest Egg

We have now described each of the product silos in turn, and we’ve given you the theoretical background of retirement income planning, which we hope describes the trade-offs between sustainable income in retirement (RSQ) and your expected financial legacy (EFL).

In this chapter, we’ll look at one example in more detail. Take the case of Robert (“Bob”) Retiree, age 65, who is trying to determine how much he can spend from his nest egg and what impact different spending plans will have on the sustainability of his spending plans, and his financial legacy.

Creating a Retirement Plan for Robert Retiree: Cases 1 through 10

Bob initially considers a 7 percent spending rate. That is, he wonders if he can spend $7 per year for every $100 of his current nest egg. Based on where that spending rate places him on the sustainability/legacy frontier, he decides to experiment with a spending rate of $6, and then settles on a spending rate of $5.50 per $100 of nest egg.

Exhibit 11.1 shows the impact of different spending rates on the sustainability of Bob’s retirement income plans and on the EFL of each spending rate. You can see that a spending rate of $7 gives him what he considers an unacceptably low RSQ (about 60 percent) coupled with a low EFL (about $7). Moving his spending down to $6 increases his RSQ to just under 70 percent and more than doubles his EFL to just under $20. Finally, shifting spending downward to $5.50 brings his RSQ up to just over 70 percent ...

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