The Retirement Plan Solution: The Reinvention of Defined Contribution

Chapter 15. The First Dial: Your Personal Spending Policy

For personal plans, you need personal planning—and a new approach in decumulation.

People have different careers, different dreams. One can't tell people, "Here's how you ought to spend your money," and expect them to be grateful for the advice. Preferences are personal. One can say, "If you want to be able to spend $X after you retire at age Y, here's how much you ought to save." One can say, "Here are the risk and return characteristics of different asset allocations. Given your risk tolerance, here's the asset allocation policy that best suits you." Savings can be expressed in monetary terms; asset allocation can be expressed in percentage terms. But what you do with the rest of your money, the part you spend—that's personal. There are rules of thumb, there are averages, there are gurus who tell you what's the minimum that constitutes poverty-level spending. But preferences—those are intensely personal.

Most people have two simple motives once they retire: to continue to live in the lifestyle to which they have gradually evolved, and to leave something for their children—or more generally, to leave bequests. You might think that you can use the same analytic processes that helped you to formulate financial plans in the accumulation phase. But you would be wrong, for at least two reasons. Decumulation needs a different framework.

In the accumulation phase, while your planning horizon isn't precise, it doesn't matter much if ...