Turning on the retirement income spigot

If you've saved an adequate amount of money to comfortably fund your retirement, you probably think you are in the home stretch. The only thing left to do is sit back and enjoy your nest egg, right? Not so fast. You may still have to navigate some rough waters, so it may not all be smooth sailing.

For one, you will still have to manage your savings to yield the income you desire to finance your lifestyle.

Financial planners favor three main approaches to converting retirement savings into retirement income: probability-based, safety first and using "buckets." A less common strategy involves weighing utility. Click on the tabs to learn about how they work.

Weighing utility

Considering that the 4-percent rule is more geared to avoiding the probability of running out of money, it doesn't really factor in the satisfaction, or utility, that you gain from your retirement savings over your retirement years.

Gold scale on brown background © Africa Studio/

JPMorgan Chase has factored in utility to develop a withdrawal model that, in addition to minding that the retirement-income spigot is turned on during your retirement, is also geared to maximizing the satisfaction you get from your withdrawals across your retirement.

Others have also used the utility concept in retirement planning studies. "A lot of retirement researchers have been using a utility-based approach in the last seven or 10 years," says Kitces. "Mathematically, if you are going to do a retirement where you have to trade off current spending, future spending, the risk of running out of money and the risk of having lots of money left over, utility happens to be one way to weigh those outcomes."

The JPMorgan Chase version uses inputs such as your age, wealth and your expected retirement income, as well as market performance possibilities, to come up with a dynamic withdrawal rate for each year of retirement. The strategy may involve changing asset allocations.

For instance, if you have a high expected income in your retirement years, you can increase your equity allocation. This is because, even though the higher equity allocation raises your risk, the safe bond-like income provides adequate protection in case of equity market downturns. In addition, you could enjoy a higher withdrawal rate than others of the same age who have the same levels of wealth. This is because the steady income provides a floor, protecting you from the risk of withdrawing too much money.

On the other hand, if you have a higher level of wealth at retirement, your withdrawal rate can be lower compared with others of the same age and at the same income levels. This comes about as you will be getting a larger dollar amount from your asset base even at low withdrawal rates. And the satisfaction, or utility, you get from hiking up your withdrawal rate is not going to be much higher once your lifestyle needs are met. Since you can generate substantial income from bond investments, you might want to cut down on your equity allocations to reduce the pain you would experience if you lost money by risking a lot in the market, which is likely to outweigh any additional utility you would get from larger returns.

This sort of utility-based approach is not as common as the others, though. Evensky says this approach doesn't speak to his experience in dealing with real investors. "The problem comes with trying to mathematically model what utility means. I find it useful in thinking through the issues, but not in terms of planning."


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