Empirical methods Prescriptive and policy At retirement, individuals stop working and no longer get employment earnings, and enter a phase of their lives, where they rely on the assets they have accumulated, to supply money for their spending needs for the rest of their lives.
More than 10,000 Post-World War II baby boomers will reach age 65 in the United States every day between 2014 and 2027.
Avoiding this risk is therefore a baseline goal that any successful retirement spend-down strategy addresses.
Analyzing one's savings involves a number of variables: Often, an investor will change some of their investment types as one ages.
A number of approaches exist to assist with choosing the correct risk level, for example, target date funds.
A common rule of thumb for withdrawal rate is 4%, based on 20th century American investment returns, and first articulated in Bengen (1994).
This particular rule and approach have been heavily criticized,[citation needed] as have the methods of both sources, with critics arguing that withdrawal rates should vary with investment style (which they do in Bengen) and returns, and that this ignores the risk of emergencies and rising expenses (e.g., medical or long-term care).
Others question the suitability of matching relatively fixed expenses with risky investment assets.
[citation needed] New dynamic adjustment methods for retirement withdrawal rates have been developed after Bengen's 4% withdrawal rate was proposed: constant inflation-adjusted spending, Bengen's floor-and-ceiling rule, and Guyton and Klinger's decision rules.
Starting with a withdrawal rate near 4% and a minimum 50% equity allocation in retirement gave a higher probability of success in historical 30 year periods.
[24] World Pensions Council (WPC) financial economists have argued that durably low interest rates in most G20 countries will have an adverse impact on the underfunding condition of pension funds as "without returns that outstrip inflation, pension investors face the real value of their savings declining rather than ratcheting up over the next few years" [25] From 1982 until 2011, most Western economies experienced a period of low inflation combined with relatively high returns on investments across all asset classes including government bonds.
Factoring in the corresponding longevity risk, pension premiums could be raised significantly while disposable incomes stagnate and employees work longer years before retiring.
[26] Traditional spend-down approaches generally recommend three ways they can attempt to address this risk: Saving more and investing more aggressively are difficult strategies for many individuals to implement due to constraints imposed by current expenses or an aversion to increased risk.
Individuals tend to have significantly more control over their retirement ages than they do over their savings rates, asset returns, or expenses.
Regardless of the strategy employed, they seek to ensure that individuals' assets available for retirement are sufficient to fund their post-retirement liabilities and expenses.