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Investing Blog Roundup: Guaranteed Income as a “License to Spend”

This week I encountered a recent paper by David Blanchett and Michael Finke in which they found that, among retiree households with similar levels of wealth, the greater the percentage of that wealth that is held in the form of guaranteed income (i.e., Social Security, pension, or annuity income), the more the household spends.

To an extent, this makes perfect sense, as a household whose wealth is overwhelmingly in the form of stocks and bonds must pick a conservative spending rate to protect against the possibility of poor investment returns, a very long retirement, or a combination of the two, while a household with a high level of pension (or similar) income can generally feel pretty safe spending all of that income. Blanchett and Finke found though that the size of the difference indicates that retirees with a low percentage of guaranteed income are likely being even more conservative than they need to be, in terms of spending rate.

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