The little things that research ignores can make a big difference in retirement.
While academic research and rules of thumb have their place, they are rarely applicable in a pure form to any single retiree.
Below are footnotes I’ve seen in recent research reports:
- “Taxes are ignored.”
- “The tax implications for different spending strategies aren’t otherwise considered.”
- “One impact variable that is not considered in this analysis is risk tolerance (or risk preference).”
- “The U.S. S&P 500 index represents the stock market, and intermediate-term U.S. government bonds represent the bond market.”
Retirees I know pay taxes. If you apply a retirement rule of thumb without considering taxes you are in for a rude awakening. What you have available to spend will be far less than what you planned.
Retirees I know have varying degrees of risk tolerance. A plan only works if you can stick with it. If you abandon a portfolio that has more volatility than you expected, your plan is in jeopardy.
The Standard & Poor’s 500 Index represent only 500 of the nearly 15,000 publicly traded stocks available world-wide. By using index funds your equity allocation can be diversified across thousands of stocks in a cost-efficient manner. In addition, there are many fixed income choices besides intermediate-term U.S. government bonds.
Academic models and retirement rules of thumb blindly apply a rule on how to withdraw agnostic of other cash flow and balance sheet items that may affect your household and your need for income.
During a transition into retirement all the households I know have varying sources of cash flows, age differentials, lumpy expense items and other considerations that must be accounted for in developing their personal plan.
Don’t get me wrong. I am not criticizing the academic research. I think research provides a great starting place on how to view spending in retirement — but it is no substitution for a personal plan.
And once you have a plan, it is not wise to simply apply a rule of thumb for the next 30 years. That is like doing a physical exam when you’re 40, and then assuming if you eat healthy and exercise regularly you won’t need to go back to the doctor until you’re 70.
What is important to your retirement success is personalized ongoing planning; a process whereby each year you check your vital signs and run a new projection on the sustainability of your income. This allows you to spot signs of trouble 20 years out and make small adjustments today that will keep your plan working all the way into your later years.
Just as you wouldn’t assess your health based solely on a research report, don’t base your retirement income solely on an academic model or rule of thumb.