Fearmongering Over Retirement 'Ruin' Misses the Point: Blanchett

Guided Spending Rates Offer Promise

In his critique, Blanchett points retirement savers (and their financial advisors) to a PGIM analysis that explores the concept of “guided spending rates.”

The research offers a fresh perspective on portfolio withdrawal rates by integrating spending flexibility (i.e., dynamic withdrawals) and new outcome metrics intended to better reflect retiree sentiment regarding various potential outcomes.

“Our model goes beyond the basic metrics, which often only measure success or failure, to introduce a series of portfolio withdrawal rates that we believe are a better starting place for retirees,” the paper states.

As a starting point, the analysis considers guided spending rates for varying levels of spending flexibility — conservative, moderate and enhanced — for three distinct retirement horizons of 40 years, 30 years and 20 years.

As the analysis explains, a conservative spending rate would be a more appropriate starting point for a retiree who is more dependent on individual savings and retirement plan balances to fund essential spending in retirement — spending on food, housing and health care, in particular.

An enhanced spending rate, on the other hand, can be more appropriate for a retiree who is less dependent on their retirement plan savings and has a reasonable amount of flexibility around the potential to adjust. This approach may also be more appropriate for those who have more guaranteed income, either through pensions or individually owned annuities.

A moderate spending rate, in turn, would be a blend of the two, and the paper provides additional guided spending rates for more granular periods in retirement.

The Bottom Line

Ultimately, Blanchett argues, better approaches to retirement income planning more accurately incorporate retirees’ decisions and preferences. When an advisor embraces such an approach, they will often find that the traditional 4% spending rule results in under-spending more than over-spending.

“Our guided spending rates are notably higher than the conventional 4% rule, providing a more fitting and responsive withdrawal rate for today’s retiree,” the paper states. “With this approach, a retiree with a moderate spending level and a 30-year retirement period (with a 5% withdrawal rate) would experience an initial withdrawal rate that is 25% higher than the 4% rule, without compromising the longevity of their nest egg.”

While safety, generally defined as not depleting a retiree’s portfolio, is a consideration when determining a spending rate, it is important to also balance out the benefits of underspending during retirement.

The best approach seeks to balance such tradeoffs more effectively, Blanchett contends. Overall, the optimal spending rate is going to vary by retiree and should be determined based on their unique situation and preferences.

Pictured: David Blanchett