Adding Direction to the Consumption Rate in Retirement

Abstract

Retirees can either spend down their money during retirement or leave it in their estate for the next generation. For those who want to sustain their living standard through retirement, there is a trade-off between how much, and how fast, they can spend, against how much they are likely to leave to their estate. By considering both the rate of consumption and the directional impact it has on wealth, we can explore this trade-off. The difference in sustainable consumption rates between full preservation of capital and full depletion of capital in retirement can be calculated to provide guidance for retirees on how their consumption rate might affect their likely estate balance. The author explains these concepts and includes a case study for an Australian retiree couple.

TOPICS: Retirement, developed markets, wealth management