The next strategy in the exhibit is Vanguard’s percentage floor and ceiling withdrawal strategy. This strategy is more variable in nature and has a little bit more in common with the fixed percentage withdrawal strategy than with the constant inflation-adjusted spending strategy. It’s a floor and ceiling method that behaves more like a fixed percentage strategy.

The initial spending level is 7.46% and with this strategy, spending also tends to decrease by year thirty across the distribution of outcomes. It is 7% less at the ninetieth percentile, 64% less at the median, and 80% less at the tenth percentile. These are dramatic spending reductions, though they are not as dramatic as with a fixed percentage spending strategy.

Relative to the baseline constant inflation-adjusted spending strategy, spending after thirty years is 66% higher at the ninetieth percentile, but it is 35% less at the median and 64% less the tenth percentile. Downside spending volatility is noticeable with a 1% average decrease at the ninetieth percentile and a 3% average decrease at the median in tenth percentiles.

Next, Exhibit 1 shows the outcomes for the Kitces ratcheting rule. This is a rule that allows for spending increases but not decreases. As such, the initial spending rate is the same as with baseline, and at the tenth percentile of outcomes spending will stay the same. Where this strategy differs is when markets do well. At the ninetieth percentile, real spending increases by 136% after thirty years, and it is 61% higher at the median. There is no downside spending volatility.

Guyton and Klinger’s series of decision rules provide the next approach in the exhibit.  This strategy supports an initial spending rate of 6.34%. After thirty years, spending grows by an additional 48% at the ninetieth percentile, though spending decreases can be expected at the median (-30%) and tenth percentile (-54%). Relative to the baseline, spending is 124% higher at the ninetieth percentile, 7% higher at the median, and 31% lower at the tenth percentile. Annual spending reductions average 1% at the median and 2% at the tenth percentile.

Zolt’s Target Percentage Adjustment rule is next, and this rule supports a 6.89% initial spending rate. After the first year, real spending never increases, but it may decrease. Spending falls by 26% after thirty years at the ninetieth percentile, and by 54% at the median and 76% at the tenth percentile. Relative to the baseline, real spending is 22% larger at the high end, 23% less at the median, and 60% less at the tenth percentile. Average spending reductions range from 1% to 2%.

The final strategy is the Modifed RMD Rule. The XYZ rule calibration allows for distribution rates to be 1.6 times that shown in the government’s RMD tables. This provides a 5.17% initial withdrawal rate. After thirty years, real spending grows by 31% at the ninetieth percentile and falls by 20% and 45% at the median and tenth percentile. Relative to the baseline, median spending is quite close to the same, while spending is 62% higher at the top and 32% lower at the bottom. This strategy effectively spends down assets in the same way as the fixed percentage strategy, and it leads to the largest downside spending reductions, which average from 4% to 6%.

Exhibit 1

Sustainable Spending Rates from an Investment Portfolio over 30 years

XYZ Rule: Allow for a 10% Chance That Real Wealth Has Fallen Below $15,000 by Year 30

For a 65-Year Old Couple, 50/50 Asset Allocation, Rolling 30-Year Retirements

Using SBBI Data, 1926-2015, S&P 500 and Intermediate-Term Government Bonds

 Retirement Date Wealth Level = $100,000

(Click to enlarge)