In addition to some portfolio issues, Guyton specifically created rules for withdrawals. Among them a 6% cap on increases and, in tough years for the portfolio, no change in cash flow would be instituted. Theoretically, clients would be willing to accept constraints on changes if it meant a higher initial withdrawal rate. The results showed a safe initial withdrawal rate closer to six percent vs. the more often cited 4% rate.
For the most part, I find people strongly attracted to a higher initial withdrawal rate for a couple of reasons. First is the tendency for many Americans to want it all and want it now. Second, juxtaposed with the fear of outliving one's assets, is a concern about never getting a chance to enjoy one's assets. Almost everyone approaching retirement tell me of things they want to do and places they want to see before their health makes such things impossible. Most people seem to believe that they will spend more earlier on in retirement than they will in their later years.
A few years ago, the U.S. Department of Labor, Bureau of Labor Statistics (BLS), released data indicating that the amount spent by persons over age 75 was dramatically lower than the amounts spent by younger retirees. This spawned a debate about why that was the case. One theory is that it simply reflects a generally higher level of health and vitality among younger retirees. The more active, the more funds are needed.
Some believe that it is a matter of pent-up demand brewing within new retirees. After working and not having a lot of free time, the new retiree is more likely to spend money to knock things off their bucket list, travel being possibly the most common manifestation of this phenomenon.
Another theory is that the lower spending is a generational issue. Older retirees often have been impacted by vivid memories of the teachings about money they received from their parents who were adults in during the Great Depression. Therefore, perhaps statistics like those from the BLS simply reflect a continuation of prior lower spending levels and not a decrease from younger years.
If this generational theory is correct, it makes me wonder if boomers would have a hard time scaling back. If so, it diminishes the likelihood that planning for expense reductions or stunting inflation increases in latter years would be a viable strategy. Bigger withdrawals coupled with a bear market early in retirement are not a good combination. If no cuts are made later, the result could be traumatic. Even without a bear market, this strategy may be problematic if uninsured health or long-term-care expenses get too high.
Though some planners are employing Guyton's decision rules verbatim, the trend I believe will have the most impact on the clients of financial planners is the increasing use of formal written spending policies to help educate, set expectations, and manage withdrawals effectively. Investment policy statements are fairly commonplace. Spending policies should be used more widely as well.
If you are not having conversations with your clients about these spending issues, I encourage you to start. If you believe clients have the discipline and capability to actually cut back in the future when planned or needed, many clients will appreciate having a higher spending rate for travel and the like in their early retirement years. Others will want no part of such a plan.
Instituting caps and freezes might work well for clients who prefer a more consistent spending pattern. This may mean only increasing withdrawals every few years for inflation instead of annually or perhaps a slow erosion of purchasing power by only making increases of say 75% of CPI is an acceptable trade-off for higher starting withdrawals. The variations are limited only by one's imagination.
What is your clients spending plan? The answer will go a long way to determining a sound distribution strategy and portfolio structure. Formulating a policy should help manage expectations and behavior for whatever the future holds. Helping your clients plan their spending may very well determine how well they spend their retirement years.