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Retirement Investors Seek Spending Flexibility
Dec 12, 2024
Investors seeking to improve retirement outcomes may benefit from strategies geared towards optimizing equity allocations to meet spending needs.
While target-date funds are a great way to accumulate assets through market cycles, spending down savings in retirement can be especially challenging given key investment risks, like inflation and market volatility.
NEED FOR FLEXIBLE SPENDING RATES
Each retiree’s financial goals may vary based on their individual needs, meaning a one-size-fits-all retirement strategy may not be practical. Traditional models to determine optimal spending strategies often don’t incorporate the desire or ability of a retiree to adjust spending during retirement. The reality is that retirees have an ability to adjust spending throughout retirement based on real-life needs and circumstances, which can significantly affect participant spending rates. Unlike traditional “safe withdrawal rates,” such as the 4% Rule, guided spending rates need to more accurately incorporate retiree decisions and preferences.
OPTIMIZE EQUITY ALLOCATIONS TO MEET SPENDING NEEDS
Spending flexibility also has important implications for other retiree decisions, such as optimal portfolio allocations. The exhibit demonstrates how the optimal allocation to equities varies across a variety of scenarios depending on the investor’s age and the percentage of the spending amount that is deemed to be “needs” (or essential expenses). We can see that investors who have higher levels of spending flexibility should typically have more aggressive portfolios and that equity allocations should generally decline by age. Overall, our research suggests spending flexibility is an important consideration when determining the optimal strategy for a retiree. Target date and flexible retirement spending strategies may be great ways for investors to improve retirement outcomes.
OPTIMAL EQUITY ALLOCATIONS BY SPENDING FLEXIBILITY
Source: PGIM DC Solutions as of 2023.
Jeremy Stempien
Portfolio Manager
PGIM DC Solutions
Spending flexibility is a key consideration when determining the optimal strategy for a retiree. Target date and flexible retirement spending strategies may be great ways for investors to improve retirement outcomes.
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