#6 The Missing Billionaires - A better approach to retirement spending

[This series is a slow chapter-by-chapter review of the book The Missing Billionaires by James White and Victor Haghani. It's getting special treatment on this blog because it is novel and can potentially result in a new Dr Wealth course. To understand it all, the best option is to read the book. Otherwise, you may need to read from the first instalment of this series here. We are currently at Chapter 9 of the book] 

In this chapter, we will be exploring a better approach to spending and investing in retirement. A lot of ink has been spilt over this matter, so it's high time someone comes up with some fundamentals on spending ratios in retirement that are more in line with economic theory.

First, we need to understand what a good solution to retirement spending looks like :

• Spending more is better than spending less.
• There is a decreasing marginal utility to spending more.
• Spending should be smooth over time.
• Spending should react to investment performance, and changes in the tax regime.
• Spending adjusts based on our longevity.

The chapter goes on to mathematically describe an approach to retirement spending that takes on investment performance parameters, information on risk tolerance and time discounting to create a retirement plan. I suspect that there is insufficient information to construct the plan on a spreadsheet as the authors run a financial planning consultancy. But the essence of the plan is a spending plan that is couched as a percentage of total wealth each year - very different from a 4% withdrawal rule that is inflexible and goes up with inflation every year. 

The effect of such a plan is as follows :

• Higher equity returns lead to more spending.
• Higher volatility leads leads to less spending.
• Longer life expectancy leads to lower spending.
• Lower subsistence requirement leads to higher total expected future spending.

If someone challenges me to hammer out a spreadsheet that can advise on retirement spending like this, it may take me a day or two, but my money is on this capability not existing in Singapore right now, partly because the industry is not convinced that maximization utility is not the way to go for wealthy clients.

But it's definitely good to be able to imagine a superior option to the 4% withdrawal rule and its variants. If anything, the 4% rule does not account for dynamic returns from the stock market every year and a person's evolving longevity as mortality tables get amended thanks to better medical science. 

If someone takes an AUM fee from me, this is what I would expect and demand. 

Hope readers of the book can agree with me on this.