Bernicke’s Reality Retirement Plan
Originator:
Type:
- Stages of Retirement
Initial Withdrawal Rate: 8.7%
Annual Spending Adjustment: Reduced Spending to Age 75, then inflation adjusted
Testing Methodology: Monte Carlo Simulation
Asset Allocation: Not Provided
Retirement Period: 30 years
Glidepath: N/A
Rebalancing: Not Provided
Guardrails: None
Bernicke’s Reality Retirement Plan comes from a 2005 paper written by Ty Bernicke, CFP. The key idea behind this withdrawal strategy is that retirees’ real spending declines throughout retirement. As such, Bernicke believes that a retirement spending plan should reflect this decline. By doing so, an individual can retire sooner and spend more during the early years of retirement.
Unlike other withdrawal strategies, the Reality Retirement Plan does not dictate a specific initial safe withdrawal rate or a set spending decline. The initial withdrawal rate reflected here is based on his 2005 paper. That paper assumed various spending decline rates from age 55 (he modeled in early retirement) through age 75 of about 3% to 4%. At age 75, he assumed an inflation-adjusted amount until the end of the plan at age 85 to account for medical expenses.
My Take
I like that this withdrawal strategy reflects how many retirees actually spend money throughout retirement. While there can be some comfort in a withdrawal strategy that adjusts spending by the rate of inflation, I’ve yet to meet someone in their 80s or older who’s spending followed this trajectory. People do indeed tend to spend less as they age, even after accounting for healthcare.
At the same time, Bernicke’s approach is more theory than an actual withdrawal strategy. As such, it’s application to real-life retirement planning is limited. What is needed is a way to model a decline in spending that is specific to a retiree’s circumstances, rather than based on government data or other surveys.
Pros & Cons
Pros
- Reflects realistic spending trends for many retirees
- Permits an initial higher withdrawal rate
- May enable earlier retirement
Cons
- Spending decline assumptions may be unrealistic
- Difficult to plan for lower spending years in advance
- Unexpected expenses could derail plan
Related Tools
The following tools can model this withdrawal strategy:
Related Research Papers
The following research papers discuss this withdrawal strategy: