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Interesting, though it suffers some of the same deficiencies that it complains about.
Basically, it is saying that if the absolute bare minimum you're willing to accept in income (draw) is less than the standard 4% (or whatever), then you can withdraw at a higher rate. But be prepared to drop down to that bare minimum, because you're significantly increasing the chance (or the amount of years) that will happen.
It is making the same simplification that things remain constant during retirement. The usual 4% withdrawal rate studies assume that the desired cash remains constant (inflation adjusted), while this study assumes that the bare minimum acceptable remains constant. Both are wrong for the same reason - spending patterns shift over retirement. (I think the spending is supposed to start high, as one has the health and relative youth to make use of the money, decline, and then increase as medical expenses rise rapidly.)
I regard the fixed percentage (traditional) studies as a proxy for this change in spending patterns over time. By underestimating what one could spend early, one also has more available for what one may likely need in latest years. Also, one should consider the probability of a catastrophic event - if this occurs early in one's retirement, that can throw all the planning off, especially if one is drawing more heavily.
While this study does consider different risk tolerances, it is addressing only the risk of market fluctuations (portfolio performance) and not the risk of extraordinary events.
Finally, just in terms of utility analysis - the paper discounts the idea that additional dollars (the difference between $60K and $80K) have less utility than base dollars (the difference between $40K and $60). It acknowledges the greater utility of the base dollars, but says that there's still some utility in the later dollars. Sure, but then it flips this argument around and suggests there's little utility in dying with money left on the table if you don't have a strong desire to leave a bequest. But just as there's still some value in the additional dollars, there's also some value in leaving money - one may not have heirs, and one may not care deeply about, say, one's alma mater, but that doesn't mean that leaving money is without value to you.
My takeaway is that one can draw "nonstandard" amounts if one is willing to be flexible, but I think we all knew that. It posits a pretty simplistic definition of flexibility (willingness to drop to a base amount, regardless of whether that happens for one year or thirty). That definition of flexibility does add something to the conversation, but still not enough.
Comments
Basically, it is saying that if the absolute bare minimum you're willing to accept in income (draw) is less than the standard 4% (or whatever), then you can withdraw at a higher rate. But be prepared to drop down to that bare minimum, because you're significantly increasing the chance (or the amount of years) that will happen.
It is making the same simplification that things remain constant during retirement. The usual 4% withdrawal rate studies assume that the desired cash remains constant (inflation adjusted), while this study assumes that the bare minimum acceptable remains constant. Both are wrong for the same reason - spending patterns shift over retirement. (I think the spending is supposed to start high, as one has the health and relative youth to make use of the money, decline, and then increase as medical expenses rise rapidly.)
I regard the fixed percentage (traditional) studies as a proxy for this change in spending patterns over time. By underestimating what one could spend early, one also has more available for what one may likely need in latest years. Also, one should consider the probability of a catastrophic event - if this occurs early in one's retirement, that can throw all the planning off, especially if one is drawing more heavily.
While this study does consider different risk tolerances, it is addressing only the risk of market fluctuations (portfolio performance) and not the risk of extraordinary events.
Finally, just in terms of utility analysis - the paper discounts the idea that additional dollars (the difference between $60K and $80K) have less utility than base dollars (the difference between $40K and $60). It acknowledges the greater utility of the base dollars, but says that there's still some utility in the later dollars. Sure, but then it flips this argument around and suggests there's little utility in dying with money left on the table if you don't have a strong desire to leave a bequest. But just as there's still some value in the additional dollars, there's also some value in leaving money - one may not have heirs, and one may not care deeply about, say, one's alma mater, but that doesn't mean that leaving money is without value to you.
My takeaway is that one can draw "nonstandard" amounts if one is willing to be flexible, but I think we all knew that. It posits a pretty simplistic definition of flexibility (willingness to drop to a base amount, regardless of whether that happens for one year or thirty). That definition of flexibility does add something to the conversation, but still not enough.