Deciding how much to spend from your investment portfolio in retirement is an important complicated task. This book guides you through the process of determining a reasonable spending rate that will strike the balance between enjoying your early retirement years while preserving enough to be comfortable later in retirement.
How much can you spend in retirement? Naturally, this is an essential question for those approaching this important life transition. If you wish to retire one day, you are increasingly responsible for figuring out how to save during your working years and convert your savings into sustainable income for an ever-lengthening number of retirement years. The nature of risk also changes in retirement, as the lifestyle of retirees become more vulnerable to the impacts of market volatility, unknown longevity, and spending shocks. Retirees have one opportunity to build a successful plan. It is not an easy task, but it is manageable and I will explain how to do it.
I walk you through the findings of a large body of financial planning research regarding sustainable spending from investment portfolios in the face of a variety of retirement risks. That body of research tends to begin with the 4 percent rule of thumb for retirement spending. I explain how and why it was developed, what it means, and when it may or may not be appropriate for you.
I have reservations about the 4 percent rule. It may be too aggressive for current retirees for reasons including increasing longevity, historically low interest rates, high stock market valuations, the impact of the international experience with the 4 percent rule, the need to maintain a rather aggressive asset allocation, and because the 4 percent rule assumes that investors do not pay any fees or otherwise underperform the markets.
Other factors suggest that sustainable spending may be higher. Reasons include that actual retirees may tend to reduce their spending with age, that they build more diversified portfolios than used in the basic research studies, that real-world retirees may be willing to adjust spending for realized portfolio performance, and that some retirees may have the capacity and tolerance to accept higher portfolio failure probabilities because they have other sources of reliable income from outside their portfolios.
Other matters you will learn about is how to analyze a variety of variable spending strategies and how to create a bucketing strategy that uses bonds to support short-term spending needs and uses stocks and other growth assets to support longer-term spending goals.
Retirees need to weigh the consequences between spending too little and spending too much—that is, being too frugal or running out of assets. This book is about implementing what I call the “probability-based” school of thought for retirement planning. It is especially relevant for people who plan to fund their retirements using an investment portfolio and those who are hesitant about using annuities or other insurance products. For those considering annuities, I suggest my book, Safety-First Retirement Planning, which is also in The Retirement Researcher’s Guide Series. For now, we have plenty to discuss about investing for retirement.
How did I come to write this book? After completing my Ph.D. in Economics from Princeton University with a dissertation about Social Security reform, I become an economics professor who studied the pension systems in different countries. Eventually I gravitated toward individual retirement planning and now work with unique job title of "Professor of Retirement Income" and as director of the Retirement Income Certified Professional® designation for financial advisors. This requires me to be agnostic and to search for the best from different retirement income styles.
Wade Pfau''s book is an exhaustive examination of sustainable withdrawals from investment portfolios. Written in lucid prose, and accompanied by copious and illuminating charts and tables, Pfau investigates the topic from every conceivable angle. With a generous nod to the findings of others in the field, Wade provides his own incisive insights to further advance understanding of this vital issue. This is a work which deserves a place in the hands of the layman and the professional alike.
-Bill Bengen, retired financial planner, father of the "4% Rule," and author of Conserving Client Portfolios During Retirement
Wade Pfau is among the most trusted names in personal finance. He''s clear, fair, and bases his advice on solid research. You never have to get trapped by a financial huckster again. Wade''s books and blogs are your reality check. Mine, too!
-Jane Bryant Quinn, personal finance columnist, and author of How to Make Your Money Last: The Indispensable Retirement Guide
Wade is one of the most prominent thought leaders in the retirement income planning industry today. His research and writing are refreshing, engaging, and thorough, and his works are must-reads for financial planners and retirees. This series is sure to become a treasured resource for those interested in better understanding retirement readiness and preparing others for retirement success.
-David M. Blanchett, PhD, CFP®, CFA, Head of Retirement Research, Morningstar Investment Management LLC
My thought after I finished reading this book was that I had walked up to the mountain top and encountered a guru, a wise, patient man who explained everything I wanted to know (and more) and gave me confidence as I walked down the mountain again - which is exactly right for the retirement drawdown stage. Wade is a wise, patient teacher, with a gift for clear and logical explanation that enables readers to have any question answered in a way that can be applied to themselves.
-Don Ezra, award-winning investment consultant and author, now happily a retired co-chair, global consulting, Russell Investments
Wade Pfau is, in my opinion, today''s leading expert in the field of retirement income planning. This series of books provides readers with valuable information gleaned from his important research and is a must read for those who want to be better prepared for their retirement years.
-Mel Lindauer, Forbes.com columnist and co-author, The Bogleheads'' Guide to Investing and The Bogleheads'' Guide to Retirement Planning.
This book provides an almost encyclopedic coverage of current thinking in retirement income strategies for those who prefer investments to annuities to take care of themselves rather than depend on their children. Clearly a lot of work has gone into this book. I have not seen any other on retirement investment that is more comprehensive and evidenced based, including my own. Full of tables, charts, and statistical insights, it may well become a standard for anyone seeking the coveted Certified Financial Planner designation. And for current CFP holders, it is a great way to bring yourself up to date with current research.
-Stephen J. Huxley, Ph.D., Chief Investment Strategist at Asset Dedication and co-author of the book, Asset Dedication
A retirement manual deeply examines the theory behind common investment and spending models.
In this book, Pfau (Reverse Mortgages, 2016) is writing for financially savvy readers interested in exploring thereasoning behind models for retirement planning, with a spotlight on strategies driven by spending expectations. Withfrequent references to Monte Carlo simulations and the work of financial adviser William Bengen, Pfau leads readersthrough spending and investment tactics, presenting the many possible outcomes based on known probabilities andassumptions about the economy of the coming decades. The volume delves into the relationship between spending andreturns, demonstrating how each can be adjusted to compensate for changes in the other and for the retiree''s personalgoals and risk tolerance. With graphs illustrating every arrangement discussed, the book makes it clear that readers whoplan to take an active role in managing their retirement funds must have the patience to study all possible scenarios inorder to approach investing knowledgeably. The author is candid about the shortcomings of historical data as a basis forinvestment decisions because of the unusually low interest rates of the present day and the fact that the information isdrawn from a limited number of overlapping periods that disproportionately emphasize the mid-20th century. While thework is focused primarily on the underlying theory, it does spend some time on concrete investment advice, highlightingthe advantages of delaying Social Security payouts and explaining how to build a bond portfolio. The volume will likelybe of greatest relevance to readers who are comfortable with statistical analysis and have the financial expertise toimplement the high-level recommendations in the context of their own economic situations; audiences in search of moredirect tips on retirement planning should look elsewhere. But for those with the necessary background knowledge, Pfauoffers a clear and coherent text ("The argument is that when retirees instead have a front-end bond ladder, they knowthere is time for stocks to recover before they need to be sold"), which should help those intending to actively managetheir retirement funds.
A detailed and well-written guide to retirement planning for those with financial literacy.
- Kirkus Reviews
Wade D. Pfau, Ph.D., CFA, is a Professor of Retirement Income in the Ph.D. program for Financial and Retirement Planning at The American College in Bryn Mawr, PA. He also serves as a Principal and Director for McLean Asset Management and Chief Planning Strategist of software provider inStream Solutions. He holds a doctorate in economics from Princeton University and publishes frequently in a wide variety of academic and practitioner research journals on topics related to retirement income. He hosts the Retirement Researcher website, and is a contributor to Forbes, Advisor Perspectives, Journal of Financial Planning, and an Expert Panelist for the Wall Street Journal. His research has been discussed in outlets including the print editions of The Economist, New York Times, Wall Street Journal, Time, Kiplinger’s, and Money Magazine. He is the author of the books, How Much Can I Spend in Retirement? A Guide to Investment-Based Retirement Income Strategies, and Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement.