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Investing Blog Roundup: Evaluating Variable Spending Strategies

A quick housekeeping note, with regard to my new book:

  • Please feel free to submit any follow-up questions that you think might be useful as future articles.
  • If you liked the book, I’d be super appreciative of a review on Amazon given that the book is very new still.
  • If you didn’t like the book for any reason, please let me know. As with any of my books, I’m happy to provide a refund.

When it comes to retirement spending, the most famous strategy is the “4% rule” in which you do not actually spend 4% of your portfolio balance per year, but rather spend 4% in the first year and then increase that dollar amount with inflation every year, regardless of portfolio performance.

And then there’s a multitude of variable spending strategies, in which you allow your spending to fluctuate in some way based on your portfolio’s performance.

Retirement researcher Wade Pfau recently wrote a two-part series about such variable spending strategies. In Part 1 he describes a framework for how to evaluate such strategies, and in Part 2 he takes a look at how a handful of the most popular such strategies measure up.

Other Recommended Reading

Thanks for reading!

Investing Blog Roundup: Retirement Spending Flexibility

Much of retirement spending research — as well as many financial planning programs — assume that a retiree household will keep spending the same (inflation-adjusted) amount each year throughout retirement. But common sense tells us that retirees probably would not keep spending the same amount, regardless of whether the portfolio is growing quickly, shrinking quickly, or holding steady.

David Blanchett highlights a recent survey of 1,500 defined contribution (DC) retirement plan participants between the ages of 50 and 70, which found that respondents were much more capable of cutting back on different expenditures in retirement than the conventional models suggest. Blanchett writes, “For example, only 15% said a 20% spending drop would create ‘substantial changes’ or be ‘devastating’ to their retirement lifestyle, while 40% said it would have ‘little or no effect’ or necessitate ‘few changes.'”

And when you account for that flexibility, an assortment of financial decisions surrounding retirement need to be adjusted. The decisions that make sense for a household that intends to never adjust their spending (other than to match inflation) are different than the decisions that make sense for a household that has spending flexibility.

Other Recommended Reading

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Investing Blog Roundup: Treasury Interest from Mutual Funds and ETFs (Avoiding Unnecessary State Income Tax)

Interest from Treasury bonds is exempt from state income tax, and that’s just as true for interest from Treasury bonds held by mutual funds that you own. But as Harry Sit points out this week, the 1099-DIV the brokerage firm sends you doesn’t tell you how much of the dividend distribution from a fund is from Treasury bond interest. If you don’t go look it up yourself, you can end up paying unnecessary state income tax.

Other Recommended Reading

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Investing Blog Roundup: I Bond Interest Confusion

A reader wrote in, wanting to share this experience in case it’s helpful to anybody else who has recently purchased I Bonds for the first time.

“I purchased $10K worth of I-Bonds for the first time in 2022, specifically on July 1st, when the annualized interest rate was 9.62%. Funds left my bank account on that same day, July 1st. Fast forward to mid-January; using straight-line logic, I’m expecting to see $481 posted into the account, perhaps a few bucks less, but only associated with timing issues. I didn’t expect to see only $236 posted (???) Could not work the math, any which way.

Called the Treasury Department, waited almost two hours on hold before talking to a human being. The Rep was fabulous to deal with – polite, professional, and knowledgeable – but the two hours on hold was brutal. He assured me that I HAD earned the full interest, but shared with me that Treasury does not actually post the interest accrued into the account, even if only for viewing purposes, due to the ‘3 month penalty’ rule for holding the security for less than 5 years. According to the Rep, this is on a rolling calendar basis and the most current 3 months of interest will NEVER show in the account, until the ‘held for 5 years’ criteria is met. The owner will never see the full interest accrual until year 5.”

Other Recommended Reading

Thanks for reading!

Investing Blog Roundup: Monte Carlo Simulations

Monte Carlo simulations are a popular way to determine how risky a given level of spending is, for a particular set of household circumstances (i.e., assets, age, other sources of income, etc.). Different software will do such simulations differently — and provide different output as well. But the most common form out output is to show a probability of success/failure — that is, in what percentage of the simulations did the household end up depleting the portfolio before the desired length of time had elapsed.

As David Blanchett discusses in a recent article, many “failure” scenarios wouldn’t even occur in real life. In part, that’s because people tend to cut their spending, if they see that it doesn’t look like things are going according to plan. Second, Monte Carlo simulations are often run using a conservative time horizon estimate (e.g., to age 100). If a “failure” scenario shows the portfolio being depleted at, for example, age 97, there’s a good chance that the original owners of the portfolio would no longer be alive and spending from it.

In another recent article, Massimo Young and Wade Pfau point out a danger of Monte Carlo simulations, which people might not recognize. Namely, while such software randomizes the results, it does so using constraints/assumptions set by the user (or set by the software developer, if the user doesn’t have options to adjust). And the results of the simulations are very sensitive to the assumptions used.

Other Recommended Reading

Thanks for reading!

Investing Blog Roundup: SECURE Act 2.0

The SECURE Act 2.0, signed into law 12/29/22, made a long list of changes to retirement accounts. The two best write-ups I’ve seen so far are from Jeff Levine and Jim Dahle.

And of course reading the legislation for yourself can be informative. (The link above will take you to text of the whole Consolidated Appropriations Act, 2023. Do a search for “Division T” on that page to get to the SECURE Act 2.0.)

Other Recommended Reading

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