The Only Spending Rule Article You Will Ever Need

Abstract

After examining an array of approaches to determining a spending rule for retirees, the authors propose the annually recalculated virtual annuity. Each year, one should spend (at most) the amount that a freshly purchased annuity-with a purchase price equal to the then-current portfolio value and priced at current interest rates and number of years of required cash flows remaining-would pay out in that year. Investors who behave in this way will experience consumption that fluctuates with asset values, but they can never run out of money.

Optimal Asset Allocation for Dc Pension Decumulation With a Variable Spending Rule

“…Note that the ARVA rule is based on determining the number of years of remaining cash flows required, at each withdrawal time. As discussed by Waring and Siegel (2015) and Westmacott (2017), taking into account mortality can front load spending into periods when retirees are more active. Waring and Siegel (2015) observe that simply basing the virtual annuity on the remaining life expectancy results in very high front load spending with a rather large drop in spending in later years.…”

“…Rather than specifying a strategy which withdraws a fixed real amount each year, we consider a strategy that responds to the actual investment experience. A recent suggestion is based on an annually recalculated virtual annuity (ARVA) (Waring and Siegel, 2015;Westmacott and Daley, 2015). AnARVA rule can be summarized as follows:…”

“…Of course, the downside is that in the event of very poor portfolio investment performance, the withdrawals may become minuscule (though the value of the ARVA portfolio will not drop to zero). Waring and Siegel (2015) justify this strategy by contending that DC plan decumulation is basically an annuitization problem. This does not require an actual annuity (hence the use of virtual in the ARVA designation), but does require annuity thinking.…”

“…This is discussed in more detail later in this article. Waring and Siegel (2015) focus exclusively on the withdrawal rule, as opposed to the asset allocation strategy. Our objective here is to optimize the asset allocation strategy for an ARVA type decumulation rule.…”

Longevity Risk and Retirement Income Planning

“…Waring and Siegel (2015) recommend something similar, except that consumption adjusts linearly and one-for-one with changes in portfolio value caused by market movements. They assert that if the investor finds such consumption adjustments too jarring, that is prima facie evidence that he is taking too much investment risk and should ratchet risk down accordingly.…”