The Retirement Spending calculator looks at retirement scenarios starting in every rolling retirement period since 1970. All retirement paths for a given asset allocation and withdrawal method are overlaid with the start year at the far left of the graph. The resulting charts allow you to see the full range of outcomes for both spending levels and account balances to consider the positives and negatives as a whole from a start-date-independent perspective.
1) The calculations assume that annual expenses are set aside at the beginning of the year in a separate interest-free account.
2) Returns include reinvested dividends, and portfolios are rebalanced annually.
3) All numbers are adjusted for inflation. So think of the spending level and account balances in today’s dollars.
4) Returns ignore taxes. Individual tax situations are far too complex for a tool like this to model.
5) The “Range of Account Balances” visual does not simply track the single best retirement path and the single worst path. It tracks every retirement scenario regardless of start year and finds the max and min account values for every year on the chart. Different points on the extremes may represent account values from different start years.
6) The calculations only look at invested assets and do not account for outside income such as social security, annuities, and income-producing real estate. If you have other income, the best way to use this tool is to apply that income towards your spending needs first and reduce your required spending in the calculator accordingly.
Withdrawal Method Definitions
The original spending is adjusted for inflation each year and is independent of portfolio value. This is the traditional method used by the vast majority of retirement studies.
Example: You have $1,000,000 at retirement and use a 4% SWR. In the first year of retirement you take $40,000 out of your investments on January 1st to fund your expenses for the year. In year 2, you increase the $40,000 withdrawal by the amount of inflation in year 1, regardless of how the portfolio performed during the year.
Spending is adjusted up or down every year as a percentage of portfolio value.
Example: You have $1,000,000 at retirement and use a 4% SWR. In the first year of retirement you take $40,000 out of your investments on January 1st to fund your expenses for the year. At the end of year one, your portfolio has decreased from the withdrawal and the markets to $900,000. So you withdraw $36,000 ($900k * 4%) for your second year expenses. You will similarly scale up expenses if the portfolio increases in value.
Spending is adjusted up as a percentage of portfolio value but never down from the new inflation-adjusted baseline. Think of it as a combination of the Constant % method in good years and the Constant $ method in bad years.
Example: You have $1,000,000 at retirement and use a 4% SWR. In the first year of retirement you take $40,000 out of your investments on January 1st to fund your expenses for the year. At the end of year one, your portfolio has decreased from the withdrawal and the markets to $900,000. Because your spending power cannot decrease with this method, you increase the $40,000 withdrawal by the amount of inflation in year 1 (let’s assume the new amount is $41,000).
At the end of year 2, the markets rebound and the portfolio is worth $950,000. 4% of $950,000 is $38,000. Because that’s still less than your spending baseline of $41,000, you increase the baseline by inflation for your year 3 withdrawal (let’s assume the new amount is $42,000).
At the end of year 3, the markets did extremely well and the portfolio value is $1,100,000. 4% of $1,100,000 is $44,000, which is an increase from your previous spending. So you set that as your new baseline and withdraw $44,000 for your year 4 expenses.
By increasing your withdrawals by a percentage of your portfolio when investments are bountiful and by inflation when investments are lean, you effectively capture the spending upside of the Constant % method while preserving the downside spending certainty of the Constant $ method. Note that in the worst case, the Baseline % method simply adjusts for inflation every year — the exact same outcome as the Constant $ method.
VPW (Variable Percentage Withdrawal)
Spending is automatically adjusted every year to respond to markets and spend most of the portfolio over your lifetime.
VPW was originally proposed by a fellow Boglehead named Longinvest and was developed by a community of investors and calculation wizards on the Bogleheads forum. The goal is to allow a retiree to efficiently spend most of his life savings while still alive without risking early depletion, and it does this by adapting withdrawals to retirement horizon, asset allocation, and effective market returns during retirement. You can read about the method and download the full working spreadsheet for yourself here.
Because of the automatic nature of the withdrawal percentages, the withdrawal rate is disabled in the Retirement Spending calculator when the VPW option is selected. Instead, you are asked to enter the age at retirement. Per recommended VPW methodology, the calculator subtracts your retirement age from 100 to set the planned retirement length. The goal is not to accurately predict life expectancy, but to set a reasonable depletion age for safe planning purposes.
Please note that the VPW calculations on Portfolio Charts do differ from the original in one respect — the assumed underlying portfolio growth rate. The VPW spreadsheet traditionally utilizes the long-term real return since 1900 for a single global stock index and bond index as part of the calculations. Because this calculator includes many more asset options, I use the real return since 1970 (the most data I have available) for the regularly rebalanced specified asset allocation. This may result in different withdrawal amounts for the same stock and bond asset allocation in the official VPW spreadsheet, but it has no effect on the timing of the ultimate depletion of the portfolio.
Also, it should be noted that many people recommend not using VPW in isolation, but in conjunction with lifelong non-portfolio base income such as Social Security (SS), a TIPS ladder to bridge retirement and the start of SS payments, a pension (if any), and (if absolutely necessary) an inflation-indexed life Single Premium Immediate Annuity. Be sure to read the Bogleheads thread in the link above for extensive discussion.
Always remember that past performance is no guarantee of future returns. Especially in retirement, I recommend exploring asset allocations that have been historically consistent in all kinds of economic environments rather than ones that posted big numbers.
The calculations here use a variety of different withdrawal methods but are still quite mechanical. Be smart about it. Just because the calculations say you could increase expenses doesn’t mean you must, and just because the calculations say that you don’t necessarily need to cut back in a down year does not mean it isn’t a good idea. This calculator is intended for general planning purposes, but your own good sense will beat any mechanical withdrawal methodology every time.
The numbers do not account for taxes. Taxes may vary significantly between individual investors, and careful tax planning is recommended when depending on money in tax-deferred accounts.