The Only Other Spending Rule Article You Will Ever Need?

A
little more than ten years ago, the Financial Analysts Journal released
“The Only Spending Rule You Will Ever Need” by M. Barton Warning and
Laurence Siegel. Recently, Stefan Sharkansky has updated and changed the
Strategic Withdrawal Plan (SWP) set forth in Waring and Siegel’s
article with a different SWP in an article entitled, “The Only Other Spending Rule Article You Will Ever Need.”Mr.
Sharkansky’s primary update/change is to specify how a retired
household’s portfolio should be invested. Specifically, he proposes that
anticipated essential expenses should be funded by a TIPS ladder and
future discretionary expenses should be funded by investment of the
remaining household assets in an equity indexed fund. Readers of our
blog will recognize that Mr. Sharkansky’s proposed investment approach
is quite consistent with ours in that we encourage funding the present
value of essential expenses with non-risky investments/assets and the
present value of discretionary expenses with risky assets, so we have no
problem with the two-asset investment approach anticipated by Mr.
Sharkansky. We will not be addressing in this post whether we
believe TIPS constitute a better non-risky investment than life
annuities or vice versa. TIPs have a clear advantage when it comes to
addressing inflation risk in retirement while life annuities enjoy a
clear advantage when it comes to addressing longevity risk, particularly
for those who plan on living longer than their life expectancy. Some
experts argue that because TIPS enjoy the full faith and credit backing
of the U.S. government, they are more secure than annuity promises made
by insurance companies. However, some worry that we might be a little
too close to testing this faith. In any event, we would not consider an
investment strategy that contained both a TIPs ladder and life annuities
(in addition to Social Security) for funding of essential expenses to
be unreasonable. We agree with Mr. Sharkansky’s conclusion that“Even
if a retiree chooses to decumulate their risky assets using an approach
other than ARVA, incorporating a TIPS ladder into their retirement plan
merits serious consideration—especially at this writing when real
yields are above their historical average, and a 30-year constant ladder
delivers a higher rate of real income than the 4% Rule.”What we don’t particularly like about Mr. Sharkansky’s proposal is that it is not a Strategic Spending Plan but rather it is a Strategic Withdrawal Plan. Therefore, we disagree with the title of his article.SWPs
generally provide an algorithm for determining how much of your
portfolio you can withdraw each year. This amount is determined without
regard to the existence of other household assets and is generally the
same real dollar amount each year with possible adjustments for
deviations between actual and assumed investment experience or (in some
instances) actual withdrawal experience.The basic problem with
SWPs is that many sources of income and many household expenses are not
linear in the real world. They can and do vary from year to year. If you have non-linear sources of income, such asDeferred Social Security benefits for one or both members of the householdFixed dollar immediate or deferred lifetime annuitiesDeath benefits or other life insurance proceedsPersonal loan repaymentsRental incomeEmployment incomeNon-lifetime distributions from defined contribution plansProceeds from asset salesOr you have non-linear planned or unplanned expenses, such asMortgage repaymentsPre-Medicare health insurancePlanned vacations until a specified ageNew automobile purchasesAssistance with grandchildren educationUnexpected or expected medical or dental costsLong-term care costsFamily supportHome remodelingThen
using a SWP like the 4% Rule (or one of its many variations), the RMD
approach or Mr. Sharkansky’s two-asset approach as a source of “lifetime
income” to supplement your Social Security benefits will likely be
inconsistent with your spending goals. If instead, you are looking for a
robust Strategic Spending Plan that can handle these
non-linear sources of income and expenses and will help you manage your
spending and your risks during retirement, you have found it here with
the Actuarial Approach.