Back in 2008/9 Gordon Pye published some articles (which eventually turned into a book) about his Retrenchment Rule. His Retrenchment Rule was really about using PMT to guide retirement decisions. His article has some interesting ideas and covers more ground than just using PMT for calculating withdrawal rates…but today I’m just going to compare withdrawal rates.
As I said earlier, PMT requires two assumptions: life span and expected returns/discount rate. VPW uses a life span on 99 and expected returns of 3.4%.
Pye says to use 110 and 8%.
What does that difference look like in practice?
What are the assumptions in that graph?
- It goes out to age 105. Which means that VPW needs to incorporate some kind of ad-hoc replanning once you his age 90. I gradually extend the life expectancy, which results in the saw-tooth cuts in spending.
- This assumes a constant 6% returns. That’s higher than VPW expects but lower than Pye expects.
As we saw previously, it takes 12–13 years for the PMT formula to “catch up”. Pye has you taking $76,000 a year to start with. VPW has you taking $48,000 a year.
Redoing it with 9% constant returns (higher than both):
Pye’s original article, “When Should Retirees Retrench? Later Than You Think” (Journal of Financial Planning, 2008) is actually a lot more interesting that the above might lead you to believe. His real goal is to use PMT as a “replanning indicator”, telling you when you need to make changes to your lifestyle. But he also shows why he chose 8% as the discount rate and why picking a lower rate doesn’t actually help you that much. He also provides the first answer I’ve seen to the question “How do you plan for retirement without relying on Bengen’s 4% rule?”