So let's say you determine an optimal spend based on a flat 6% gain in equities, 3% bonds, and 2.5% inflation (a-la i-orp). We all know that sequence of returns will play havoc with that, but let's take that optimal spend amount as a starting point. Now, say you have 35 years left in your plan and the PE10 is 28, so 75% over it's historical average. Based on discussions concerning the negative effect of starting your retirement in a market down-turn, I'd say it would be wise not to spend all of the optimal spend amount. With 10 years left in your plan, probably not as much of a concern.
There is a draft paper on the i-orp site that addresses retirees' annual visit to i-orp, then using that result to determine how much they can spend for the year (the "3-PEAT" process). That paper uses a historical data approach, much like the back testing in the VPW spreadsheet does. But when I looked at the "DI" disposable income (spending) results in the paper, it looked very traumatic. Maybe not traumatic for someone who has a big discretionary budget, but for a retiree playing it closer to the edge, there are annual budget cuts in that paper that would send them to bankruptcy.
All of that got me thinking about how to use what we know (PE10) to smooth out the annual spending by limiting spending in years with a "hot" market.
There is a tool for Android that I wrote which allows you to exercise the 3-PEAT process automatically. You put in your typical i-orp inputs, but you also include an historical starting year. Then your portfolio is subject to whatever market forces were in effect for that year, and follow-on years, for the duration of your plan. The tool allows you to run with spending limit 'on' or 'off'.
So far, I've concentrated on simulating starting retirement in 1999, and what I have concluded is that if you run with a spend limit:
- you can increase your overall plan spending by a few percent,
the early withdrawals are significantly less (20%-25%) than that proposed by the steady growth 6%/3% i-orp assumptions,
the budget cuts in down markets are less severe,
but it does take 20 years of a 40 year plan to break even.