Tuesday, March 1, 2011

Vanguard looks at ways to spend retirement savings

Vanguard looks at ways to spend retirement savings
Vanguard (March 1, 2011) 

 
Interesting read.  Stochastically testing three spending strategies using proprietary data and assuming a 50% equity/ 50% bond investment mix (rebalanced each year), the Vanguard Investment Strategy group determines that the "percentage-of-portfolio" approach with limits on annual increases or decreases in the previous year's amount is preferable to the other two approaches studied.  Article implies that a 4.75% initial withdrawal rate is reasonable for a 35-year payout period and the 50%/50% investment mix (implying about a 3.5% real annual rate of investment return using the "Excluding Social Security" spreadsheet above).  There appear to be some mixed messages in this article as the authors state that maintaining a flexible spending plan is key, but recommend a plan that is not flexible, and they fail to address how their recommended plan should be adjusted for adverse (or favorable) experience.