What is the Retirement Spending Smile?

For the most part, retirees approach retirement planning thinking they’ll just implement one plan and then spend the same amount throughout their retirement. Of course, this assumption makes the retirement planning process notably simpler, but it’s not practical. Most people’s spending desires, needs, and priorities change over time. So, it’s rare to find a monotonic retirement plan that remains constant throughout the retirement period. This brings in the retirement spending smile.

Most people take full advantage of the first few years of their retirement to travel, make up for lost time, or even just partake in their slightly expensive hobbies. So, spending is relatively high the first few years. Interestingly, as retirees get older, they tend to slow down and spend less as the years go by. But then the curve goes up again towards the end of their lives when several medical expenses start popping up. This up, down, and up again movement is what we call the retirement spending smile. 

The Guardrails Retirement Withdrawal Strategy and Monte Carlo Simulations 

The guardrail retirement withdrawal strategy has gained a lot of traction in the past few years due to its theoretical effectiveness. First, the technique involves withdrawal frameworks that set thresholds that could trigger an increase or decrease in retirement spending. Most experts agree that the formula can be effective because of the advantages of managing retirement spending expectations. For example, the guardrails strategy can tell a client when a spending change should occur and how much of a spending increase or decrease would result from the shifts in spending. However, the approach is primarily built upon portfolio withdrawal rates, which rarely capture a lot of retiree-specific results that could trigger a change in spending habits.

On the other hand, in the Monte Carlo simulations, their ability to incorporate retiree-specific practices into a simulation reflects much better outcomes to a given retiree’s goals and preferences. 

Listen now to learn Can I Retire Now? The Right Spending Plan May Be The Difference