In those two posts, I expressed the opinion that investing in equities in order to increase a retiree's spending throughout retirement isn't terribly appealing because a) retirees typically — though not always — spend less as they get older and, b) by the time he earns the additional spending with stock market gains the retiree might well be too old to enjoy spending them.
Wade's response was, and I paraphrase here, "Well, yes, but retirees don't invest in equities to increase their spending if their portfolio grows."
Wade explained that he believes retirees are attracted to systematic withdrawal (SW) strategies primarily by the probability of greater spending than is attainable through investing in safer alternatives (albeit with risks of the opposite outcome). He believes that potentially increasing one's standard of living beyond the initial spending suggested by SW is merely a side-effect of the SW strategy, not a major consideration by retirees or one promoted by advisers.
I completely agree with the first part of that statement: the primary attraction of SW is the possibility of greater spending than with safer investment alternatives.
I argue, however, that it is not the only SW benefit marketed to retirees or expected by them. I believe there are three:
- The potential to support more spending than with annuities or bond ladders
- The potential to support the initial withdrawal amount annually for 30 years and leave a large legacy portfolio, and
- The potential to improve one's standard of living throughout retirement if the portfolio grows.
The risk, of course, is that none of these potentials will be realized.
I would point out that with SW strategies, spending can increase over time, or decrease if the portfolio shrinks. As Michael Kitces pointed out in his critique of "The 4% Rule - At What Price?" by Scott, Watson and Sharpe, SW strategies are seldom implemented in the precise way depicted in that (and other) papers.
After portfolios grow significantly, advisers encourage retirees to spend more (increase their standard of living), according to Kitces, rather than stick with their initial withdrawal amount. I trust they would recommend the opposite should the portfolio contract significantly.
If this is truly the way SW is implemented, then the retiree would increase her spending contemporaneously with the growth of wealth (and decrease spending similarly if the portfolio contracted).
Wade and I actually disagree on very little here. We agree that increasing spending throughout retirement isn't the best reason to invest in equities after retiring. The question Wade and I are asking is this. Is the promise of continually improving your standard of living as retirement progresses a significant incentive for you to invest in equities after you retire?
We would both appreciate your thoughts below or at Wade's blog. And if you're an adviser, please let us know.