Executive Summary: Building a nest egg can be pretty straightforward—spend less than you earn and spend time in the market. Unfortunately, there’s no similar consensus on how to spend a nest egg through retirement. In this article, I go through the pros and cons of a variety of retirement spending strategies: the 4% rule, the constant percentage method, Vanguard’s dynamic spending, the probability of failure (Monte Carlo) strategy, the bucket approach, income annuities and Vanguard’s all-in-one fund solutions.
If there’s one question on the lips of almost every retiree I’ve ever met, it’s “How much can I spend?”
Spending your nest egg in retirement while making it last has been the subject of countless books, magazine articles and college lectures. It’s a complicated question because there is no magic solution or right answer.
We “know” how to go about preparing for retirement. As I often recommend, spend less than you make, save consistently and invest in the stock market. There’s nothing too controversial there.
But it’s down the road that the questions begin. What if you are about to enter or are already in retirement? How should you go about spending your nest egg? If you look around, you’ll quickly find that there is no consensus on this topic. And worse, most retirees are left to their own devices to navigate the retirement spending challenge.
Or, as Vanguard’s new CEO, Salim Ramji, recently said,
We have been very focused on helping clients accumulate assets, but the industry hasn’t done much to help on drawdowns.
With many retirement spending strategies debated in the media, ranging from the simple to those requiring high-powered computations, it’s no wonder that many retirees feel paralyzed when setting a course.
I’ll try to help you make heads and tails of the most common retirement spending strategies, including Vanguard’s various solutions. I won’t give you “the answer” because I don’t think there is one. But I hope laying out the pros and cons of different approaches will help you find the one that is right for you.
The bottom line is that the principles that have served us well getting to retirement will continue to do so during it: Remaining disciplined in our spending and investing, focusing on total return rather than income, and holding the best funds Vanguard has to offer as we chart our retirement course.
This is a long read. To help you along the way, I’ve created a cheat sheet for the different withdrawal strategies.