Olde Hornet
Well-Known Member
https://retirementplans.vanguard.com/VGApp/pe/edufreshness/RetirementIncomeStrategies#/
A number of spending rules have been developed to simplify retirement plan calculations. We outline two below and suggest an additional one of our own.
“Dollar plus inflation” rule
The 4% spending rule is simple to follow: You withdraw 4% of your portfolio in your first year of retirement, then the same amount increased by the rate of inflation every year after that.
Your optimal withdrawal rate could be higher or lower than 4%, depending on your situation and how conservatively or aggressively your portfolio is invested. That’s why we use a broader label to define this strategy: the “dollar plus inflation” rule.
“Percent of portfolio” rule
The 2007-08 financial crisis underscored the havoc that financial markets can wreak on even the best-laid retirement plans. Continuing to spend the same amount in inflation-adjusted terms under the dollar plus inflation rule made many recent retirees uncomfortable, and with good reason: The drop in the stock market significantly raised the chance they might outlive their savings.
The “percent of portfolio” rule aims to resolve this issue by taking market performance into account. Each year, you spend a set percentage of your prior year-end’s portfolio balance. The dollar amount available for you to spend will increase if the markets have done well and decrease if they haven’t. You won’t deplete your portfolio, but your annual spending could vary significantly depending on market returns. That might work for those willing to make big budget cuts during down markets, but not all retirees are able to do so.
A number of spending rules have been developed to simplify retirement plan calculations. We outline two below and suggest an additional one of our own.
“Dollar plus inflation” rule
The 4% spending rule is simple to follow: You withdraw 4% of your portfolio in your first year of retirement, then the same amount increased by the rate of inflation every year after that.
Your optimal withdrawal rate could be higher or lower than 4%, depending on your situation and how conservatively or aggressively your portfolio is invested. That’s why we use a broader label to define this strategy: the “dollar plus inflation” rule.
“Percent of portfolio” rule
The 2007-08 financial crisis underscored the havoc that financial markets can wreak on even the best-laid retirement plans. Continuing to spend the same amount in inflation-adjusted terms under the dollar plus inflation rule made many recent retirees uncomfortable, and with good reason: The drop in the stock market significantly raised the chance they might outlive their savings.
The “percent of portfolio” rule aims to resolve this issue by taking market performance into account. Each year, you spend a set percentage of your prior year-end’s portfolio balance. The dollar amount available for you to spend will increase if the markets have done well and decrease if they haven’t. You won’t deplete your portfolio, but your annual spending could vary significantly depending on market returns. That might work for those willing to make big budget cuts during down markets, but not all retirees are able to do so.