Setting a strategy for retirement withdrawals

This graph shows the spectrum of the 3 spending rules. On the left is the dollar-plus-inflation rule with a 0% ceiling and floor, in the middle is the dynamic spending rule with a 5% ceiling and –1.5% floor, and on the right is the percentage-of-portfolio rule with an unlimited ceiling and floor. Underneath the spending rules are 4 lines showing the different portfolio characteristics and how each rule impacts them. The first line, market performance, shows that dollar-plus-inflation ignores market performance, dynamic spending is somewhat responsive to it, and percentage-of-portfolio is highly responsive to it. The second line, short-term spending stability, shows that short-term spending stability is stable with dollar-plus-inflation, fluctuates within limits with dynamic spending, and is variable with percentage-of-portfolio. The third line, spending flexibility, shows that spending flexibility is less flexible with dollar-plus-inflation, more flexible with dynamic spending, and highly flexible with percentage-of-portfolio. The fourth line, portfolio viability, shows that portfolio viability is unpredictable with dollar-plus-inflation, is more stable with dynamic spending, and can't be depleted with percentage-of-portfolio.

This framework allows you to decide how much you want to benefit from good markets by spending a portion of those gains. And it enables you to weather bad markets without substantially reducing your spending.

Best of all, dynamic spending can mean greater spending levels throughout retirement. For example, our historical research† showed that a retiree with a portfolio of 50% stocks/50% bonds could withdraw 4.3% a year with 85% confidence that the portfolio would last through 35 years of retirement. But by incorporating dynamic spending, with a –1.5% floor/5% ceiling, that retiree could withdraw 5.0% a year and have the same level of confidence.