Afford Anything

How Much Can I Spend in Retirement? - with Dr. Wade Pfau

Mar 5, 2018

Dr. Wade Pfau, a retirement income professor, shares intriguing insights on the complexities of retirement planning. He challenges the traditional 4% withdrawal rule, emphasizing the importance of adaptability and the potential need for part-time work. Pfau discusses the 'Four L's' of retirement—lifestyle, longevity, liquidity, and legacy—encouraging a fresh approach to risk management. He also introduces innovative strategies like the U-shaped stock allocation to navigate financial volatility, ensuring a more secure and fulfilling retirement.

59:52

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Wade Pfau

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Quick takeaways

Effective retirement planning hinges on the four L's: lifestyle, longevity, liquidity, and legacy, guiding financial decisions post-retirement.

Understanding different asset categories—reliable income, diversified investments, and reserve assets—is essential for managing risks and meeting varying financial needs.

Adopting a U-shaped stock investment strategy in retirement can help mitigate sequence of returns risk and enhance long-term financial stability.

Deep dives

The Four L's of Retirement Planning

Retirement planning is centered around four critical financial goals known as the four L's: lifestyle, longevity, liquidity, and legacy. Lifestyle focuses on the annual budget and discretionary spending that enhances one's life after retirement. Longevity, on the other hand, refers to essential expenses that need to be covered for as long as a person lives, ensuring that these foundational costs are secure. Liquidity pertains to having accessible funds for unexpected expenses, while legacy represents the desire to leave behind assets or financial resources for future generations.

Intro

2min

Mastering Retirement Planning

16min

Navigating the 4% Withdrawal Rule for Early Retirement

6min

Navigating Financial Risks in Retirement

11min

Exploring Retirement Strategies and Fitness Solutions

5min

Navigating Passive Income for Retirement

10min

Flexible Strategies for Retirement Planning

9min

#119: Once upon a time, in southern California in 1994, there lived a man named William Bengen.

He read many claims, widespread at the time, that said that since the markets return at least 7-9 percent compounding rates on average, retirees could withdraw and spend 7 percent of their portfolio.

William had a hunch that this was misguided. He decided to prove it.

He looked at 30-year timespans in U.S. history, starting from 1926. The first timespan ranged from 1926 to 1955. The second timespan ranged from 1927 to 1956. And so forth.

He assumed that the retiree held 50 percent stocks, in the form of an S&P 500 Index, and 50 percent bonds, in the form of intermediate-term government bonds.

Then he asked two questions:

First, what was the worst-case scenario? Retiring in 1966. The 16-year timespan from 1966 to 1982 was extra-rough, and experiencing this sequence of returns at the start of retirement made for one sad, sad puppy.

Second, how much could an investor sustainably withdraw from her portfolio during that worst-case scenario? The answer was 4.15 percent in the first year, and 4.15 percent, adjusted for inflation, every subsequent year.

And thus, the 4 percent rule-of-thumb was born.

And we all retired happily ever after.

____

Or did we? This week's episode features an interview with Dr. Wade Pfau, who offers counterintuitive ideas about retirement income.

Dr. Pfau is a Professor of Retirement Income at The American College of Financial Services.

He holds a Ph.D. in economics from Princeton. He's a chartered financial analyst. He won two awards for "most outstanding contribution" from the Journal of Financial Planning. He won another award for "best paper in retirement planning" from the Academy of Financial Services.

This guy knows his stuff.

And he's ... *cautious* ... about the 4 percent rule of thumb.

What are his concerns?

What can we expect?

And how much money can we spend in retirement -- whether we enjoy a traditional or early retirement?

Find out in today's episode.

____

For resources mentioned, visit https://affordanything.com/episode119

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Afford Anything

How Much Can I Spend in Retirement? - with Dr. Wade Pfau

Episode guests

Podcast summary created with Snipd AI

Quick takeaways

Deep dives

The Four L's of Retirement Planning

Understanding Retirement Risk Management

Probability-Based vs. Safety-First Approaches

The U-Shaped Allocation Strategy

Flexibility as a Core Strategy

Remember Everything You Learn from Podcasts