Spending Levels in Retirement
The article focuses on
the range of annual available spends during retirement. Here are some thoughts on how the spending
levels might affect investments.
How much will you need
in retirement, and how does investing tie into this? To what extent might (should) a retiree be
willing to risk not reaching planned spending levels? Consider these three levels of spending.
Spending Level 1. A sustenance level where the individual or
couple lives healthily with little more, say 40-50k.
Spending Level 2. Minimum happiness level. Daniel Kahneman and others have concluded
that there is a spending level above which additional income does not bring
more happiness, say 80k.
Spending Level 3. A level above Level 2 that maintains (or
exceeds) the pre-retirement lifestyle,
say 100k or more, with no upper limit.
Most retirees will
fall somewhere in the first two levels. How
much safety is required at each level? Considerable
conservatism, perhaps using a liability matching portfolio of annuities or a
TIPS ladder, will likely be optimal at Level 1, and some similar degree of
conservatism may be desirable at Level 2.
No rules seem appropriate for
Level 3.
Richard Thaler and
many others have written extensively on the behavioral aspects of
investing. The behavioral aspects of
spending don't seem to have received much attention. Some at Level 3 are extremely frugal and
others are spendthrifts. Some need to
keep up with the Joneses, others could care less. Some are flexible in lifestyle and others
inflexible. Some have an irrational fear
of running out of money, and some are eternal optimists. Even at the level of super wealthy, we have
Warren Buffett and Dennis Kozlowski.
For those at Level 3
it is likely unnecessary and too costly to create a LMP to assure certain
spending availability. When considering
all of the behavioral differences, it seems clear that there is no single
formula that will apply to all. At Level
3, all planning must be ad hoc.
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