Ryan Wibbens is a senior financial advisor with Vanguard Personal Advisor®, where he advises high-net-worth families on how to achieve their goals. He joined Vanguard in 2017 and previously worked as an associate at Morgan Stanley.
Ryan is a Certified Financial Planner™ (CFP®) professional with a B.S. in finance from the University of Delaware and an M.B.A. from NYU Stern School of Business. Ryan also holds the Series 7 and 66 licenses.
Most people spend years saving for retirement. Then, when the time comes to begin spending their savings, they have no strategy in place.
Many studies—including our own research 1 —have shown that successful retired investors often don't spend much of their retirement savings, and their money continues to grow. It's not a terrible problem to have, but it could mean these investors are being overly frugal in retirement because they're not sure how much they can "safely" spend.
It's crucial to have a strategy for accumulating retirement assets. Equally important is a strategy to withdraw from your retirement savings. Your withdrawal strategy should accomplish 2 often-competing goals:
There are several ways to successfully withdraw from your retirement savings. Our advisors can help you determine which approach might work best for you.
The dollar-plus-inflation strategy calls for you to spend a percentage of your portfolio the first year and adjust that amount in subsequent years based on inflation.
Here are some things to know about this strategy:
The percentage-of-portfolio strategy calls for you to spend a fixed percentage of your portfolio every year. This strategy:
As the name implies, a fixed-dollar withdrawal strategy involves taking the same amount of money out of your retirement account every year for a set time, then reassessing. It can:
With a fixed-percentage withdrawal strategy you withdraw a fixed percentage of your retirement portfolio each year, regardless of market performance. This can be a good way to ensure that you don't outlive your savings.
Here are some of the pros and cons of a fixed-percentage withdrawal strategy:
Finally, there's the withdrawal "buckets" strategy, which divides your retirement savings into 3 buckets: short-term, intermediate-term, and long-term.
Our advisors are here for you. Based on your asset level, you may want to explore this offer further. Call us at 844-896-5677 Monday through Friday, 8 a.m. to 8 p.m., Eastern time.
No matter which strategy you choose, you'll start by selecting a withdrawal amount for the first year. In the planning phase, many retirement calculators rely on this as a critical component to determine how much you need to save.
Although 4% is a popular guideline, research has established it as "safe" only for specific time frames and allocations. And safe means different things to different people. For you, 4% could be too much—or too little. Here are the factors we consider when choosing a withdrawal rate for a client:
This graph illustrates the 4 factors that influence how much or how little you should withdraw. The first line, time horizon, shows that you should withdraw at a lower rate if you have a longer horizon and at a higher rate if you have a shorter one. The second line, asset allocation, shows that you should withdraw at a lower rate if you have a more conservative asset allocation and at a higher rate if you have a more aggressive one. The third line, spending flexibility, shows that you should withdraw at a lower rate if you don't mind less spending flexibility and at a higher rate if you'd prefer more spending flexibility. The fourth line, degree of certainty desired, shows that you should withdraw at a lower rate if you desire a higher degree of certainty and at a higher rate if you're comfortable with a lower degree of certainty.
You want a strategy that accomplishes 2 often-competing goals: 1) having enough money to support your desired lifestyle, and 2) ensuring there’s enough left for the future. We’ve got a strategy that can help you with both.
—Ryan Wibbens, CFP®, Financial Advisor
Since many people equally prioritize spending levels and portfolio preservation, we created a retirement strategy that helps achieve both important goals—covering current spending while aiming to preserve enough money for the future.
Dynamic spending is a hybrid of the dollar-plus-inflation and percentage-of-portfolio strategies. It builds on people's natural tendency to spend more when markets are up and less when markets are down—but moderates the wild swings you get when giving market performance free rein over your spending.
In other words, it achieves a happy medium. Your spending is more flexible than with a dollar-plus-inflation approach but also more stable than with the percentage-of-portfolio approach. It's also completely customizable, so in addition to deciding how much to withdraw the first year, you decide how much you're willing (and able) to raise or lower your spending in response to market movements.
To use dynamic spending, you calculate the upcoming year's spending by adjusting the amount of this year's spending based on your portfolio return for the year. But you don't go any higher than the "ceiling" or any lower than the "floor" you set as part of your strategy.
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 3 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.
Careful spending is even more important for early retirees. We looked at sustainable withdrawal rates for the "financial independence retire early" (FIRE) community and found a safe withdrawal rate of 3.3% for someone with a 50-year time frame using the dollar-plus-inflation strategy. But by using dynamic spending instead, the safe rate increased to 4.0%. 4
Setting your floor and ceiling as well as deciding on the right initial withdrawal rate means you'll need to make several decisions and maintain an additional level of oversight to use dynamic spending. And since all these factors depend on your personal time horizon, allocation, retirement income sources, and priorities, there's no right answer for everyone.
If you're interested in incorporating dynamic spending into your withdrawal strategy, you can learn more in our research paper, or set up a consultation with a Vanguard advisor.
Working with Vanguard gives you access to advisors who are fiduciaries—obligated to act in your best interests. You can take your withdrawal strategies to the next level while possibly minimizing taxes with a Tax-Efficient Retirement Strategy (TERS). As a Personal Advisor Select client, you'll have access to an advisor who can use this exclusive and sophisticated tool to help build a withdrawal strategy that accounts for your personal tax situation and your income needs, while also helping preserve your portfolio. Based on your asset level, you may want to explore this offer further.
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