Chapter 5. Sustainable Spending

The four basic dynamics that lie behind a retirement plan are how long you live, how much you save, how large an investment return you earn, and how much you spend in retirement. We have dealt with the principles of longevity, saving, and investment in the preceding chapters. In this chapter we discuss spending.

We will see, when we discuss individual issues in decumulation, that the relationship between the amount of money saved and the amount of spending it will support is badly misunderstood by most people, and that many are overconfident as they approach retirement. Later, though, they realize that their challenge has changed from how to accumulate enough wealth to making their wealth last as long as they can. Many people fear running out of money in old age. This is an understandable fear. We need to be attentive to the risks but not overly cautious. Doing so can create another problem: living at an unnecessarily low standard of living. As a colleague put it, "the basic challenge for a new retiree is to spend enough today so as not to starve, but not so much today that they will starve tomorrow."

It is common for people planning for retirement to ask, "How much of my retirement money can I safely spend each year?" There are two ways to provide an answer. One is to look at purchase rates for an immediate annuity. The other is to make some assumptions as to how long they will need to sustain a proposed rate of spending and what their future investment ...

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