RETIREMENT SPENDING

The Retirement Spending chart compares the effects of a variety of different withdrawal rules on both spending levels and account balances in retirement.  Use this to identify a withdrawal method best suited for your portfolio, to understand the real-life failure points that have caused your plan to falter, and to explore financial strategies that will not only survive the worst case but also thrive in the good years.

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How To Interpret The Chart

There are two ways for a portfolio to fail you in retirement:

  1. Your account can run out of money
  2. The withdrawal strategy you are using may not support a withdrawal amount that meets your minimum expenses

To make sure a retirement strategy meets your personal needs, the Retirement Spending calculations track two different sets of data simultaneously — the ongoing account values for your investments and the annual withdrawals coming out of that account. To avoid any bias resulting from looking only at a single retirement timeframe that may look nothing like your own, it studies the real-world retirement results of every annual start date we have data for and displays the full range of outcomes on a single chart. So the best and worst outcomes on record are all represented. (Read this for more info on how the timeframe affects the numbers compared to other well-known studies.)

You can set your initial portfolio value and play with a variety of different withdrawal rules to study how various withdrawal strategies affect both the longevity of a portfolio in the worst retirement periods and also the upside of its withdrawal potential in the best retirement periods.

Calculations

The initial withdrawal is equal to the current account value multiplied by the specified annual withdrawal rate, and all withdrawals are assumed to be set aside on January 1st into a separate account to fund expenses for the year. The withdrawals are modified by inflation each year before increasing or decreasing in proportion to the real gains and losses of the portfolio subject to a variety of withdrawal rules:

Change Limit

This specifies the maximum allowable increase or reduction (after accounting for inflation) from the last withdrawal. For example, if the maximum increase is set to 10% and the real portfolio value increased 5%, the withdrawal increase for the next year is 5%. But if the real portfolio value increased 15%, the maximum increase is capped at 10%. Note that portfolio increases and decreases can be independently controlled.

To disable a change limit and allow any increase or decrease in spending regardless of the magnitude of the change, set the limit to “X”.

Account Trigger

This specifies account thresholds that must be met before a withdrawal can be changed, and the triggers are marked on the Account Values chart. For example, if the trigger for an increase is set at 25%, then no increase will be allowed until the real account value reaches a level 25% over its initial starting point. And if the trigger for a reduction is set to 0%, then no reduction will be allowed until the real account value is below its initial starting point. Note that account triggers can be positive or negative regardless of whether they control an increase or a reduction, allowing you to create a middle band that either allows for no change or any change.

To disable an account trigger and allow an increase or decrease in spending regardless of the account value, set the trigger to “X”.

Withdrawal Limit

This specifies withdrawal thresholds that cannot be exceeded. The high and low limits are marked as “Ceiling” and “Floor” on the Withdrawal Amounts chart. The floor is particularly important in any analysis of retirement spending, as this sets a limit on how much the spending strategy is allowed to cut your withdrawals. Be sure to set this at level of your real-world barebones expenses. The upper spending limit is also valuable to put the resulting withdrawals in context of what you realistically think you’ll need to be happy, as tripling your expenses per the withdrawal strategy may sound fun but could be harder than you think.

To disable a withdrawal limit and allow an increase or decrease in spending regardless of the withdrawal amount, set the limit to “X”.

Popular Withdrawal Strategies

In addition to studying your own ideas, the Retirement Spending tool can also be used to model a variety of well-known spending strategies. Here are a few of my favorites along with their required settings.

Constant Dollar

The basic assumption used in the vast majority of retirement research including William Bengen’s original paper and the famous Trinity Study. Note that this is the assumption used in the Withdrawal Rates and Financial Independence calculations. The most conservative of the options, it’s a great place to start for judging how well a retirement portfolio can maintain purchasing power over time.

Constant Percentage

A popular alternative to the Constant Dollar method that allows for withdrawals to proportionally adjust to account values every year. Note that this disables every withdrawal rule and causes the account value to simply be multiplied by the withdrawal rate with no modifications. While it can technically never run out of money, keep an eye on withdrawals that may drop below your minimum required expenses.

Bengen Floor & Ceiling

Proposed by William Bengen as a balanced approach somewhere between the Constant Dollar and Constant Percentage methods, this allows for wide swings in withdrawals but places a floor and ceiling on withdrawal amounts.

Clyatt 95% Rule

Described in Bob Clyatt’s book Work Less Live More, this allows the withdrawals to adjust up proportional to the account value but never reduces spending by more than 5% in any one year.

Kitces Ratchet

A withdrawal method suggested by Michael Kitces to maintain the downside protection of the Constant Dollar method while intelligently increasing spending when possible. It ratchets up withdrawals by 10% when the account value exceeds 50% above its original level but allows for no withdrawal reductions. Note that Kitces recommends adjusting a portfolio only every three years while the Retirement Spending calculator does this annually. Also note that this calculator considers the increase to be a cap rather than a fixed value.

Guyton-Klinger

Created by Jonathan Guyton and William Klinger, this uses withdrawal rate triggers to control increases and decreases in withdrawals while also limiting the rate of change. While they quantify the triggers in terms of +/- 20% of the original withdrawal rate, the same numbers can be directly translated to account values of +/- 25%. Note that while the the full Guyton-Klinger method uses four different “decision rules” (here’s a good explanation), the calculations here focus on the capital preservation and prosperity rules. This tool always accounts for inflation and reinvests excess returns into a rebalanced portfolio.

Notes

All calculations are adjusted for inflation and are expressed in constant dollars. So the default assumption with no changes in withdrawals is that your spending will increase by inflation every year to maintain the same purchasing power. This also means that the account values displayed will be smaller than the nominal numbers you may experience in your personal investing account.

The calculations here do not account for taxes and fees. When looking at the withdrawals, be sure to allocate a portion of that money to your personal tax bill.

The calculations assume that your annual withdrawal is taken out of your investment account at the beginning of the year. So the Withdrawal Amounts chart shows values at the beginning of the year indicated while the Account Values chart shows values at the end of the year indicated.

The withdrawal amounts shown are the spending levels supported by your investment account. Any other income such as social security, annuities, or part time work can be added to the withdrawal amount to determine your full budget.