Show clients that, yes, they can spend more in retirement

Pink Piggy Bank

Show clients that, yes, they can spend more in retirement

Vanguard Perspective


May 15, 2024

Your clients approaching retirement may harbor concerns about spending from their hard-earned nest egg. What’s the spending sweet spot that will sustain them throughout retirement? Should they worry if the market is “too high” or “too low,” especially right before they take the retirement plunge?

They may have heard the ongoing debate about the venerable “4% rule” as the “ideal” retirement spending rate. But does 4% of assets plus an inflation adjustment annually still hold in today’s environment? Or is it perhaps some other calculation?

A new video from Vanguard Investment Advisory Research Center can help you address some of those client questions and concerns by introducing the concept of dynamic spending (a topic covered in greater depth in the white paper From assets to income: The Advisor’s Alpha® guide to retirement spending). This retirement spending strategy focuses on flexibility, so retirees can enjoy more of their money more sustainably than if they adhered to spending a flat percentage of assets annually.

A line chart depicts three distinct, hypothetical $1 million portfolios as their balances are affected by financial markets and withdrawals. The portfolios consist of 60% U.S. stocks and 40% U.S. bonds and have been inflation adjusted. They represent the span of a 30-year retirement and start at different years meant to reflect a broad variety of economic and market conditions when they were initiated: Portfolio A (1973), Portfolio B (1983), and Portfolio C (1993). Each of these three portfolios uses a dynamic spending strategy to provide annual income for a retiree. The chart’s y-axis shows inflation-adjusted annual income, ranging from $10,000 to $119,223. The x-axis shows time by year, from 1970 through the end of 2022 (the final data point, for Portfolio C, is in 2023). At the $40,000 mark, a flat line represents the inflation-adjusted value of applying the “4% rule” for the entire timeline. For all three portfolios, using dynamic spending allowed a retiree to spend and enjoy more of their money (Portfolio A , $25,799 extra enjoyed, Portfolio B  $1,542,938,  and Portfolio C $731,035) than if they had applied the 4% rule to derive income.

Source: Vanguard Investment Advisory Research Center.

Hypothetical example. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Right-click on the video and save it to send to clients.


Share the benefits of a dynamic spending strategy with your clients

Sharing this strategy could provide a timely way to serve clients who express worries over the potential sequence-of-returns risk associated with market extremes or other topical issues. Whether they show concern about the effects of the political atmosphere, technological trends, or the economy on their portfolio, you can acknowledge the concern. Then point out that, over time, the market has proven resilient. Easing clients’ worries (with empathy and data) benefits them. Generating trust, goodwill, and the greater likelihood of referrals benefits your practice.

As the video shows, dynamic spending has historically proven effective (that is, allowing the client’s desired income or greater to be withdrawn in most years) when applied in bear and bull markets alike. To be clear, there are tradeoffs to the strategy; since the emphasis is on spending comfortably during the client’s lifetime rather than ending with a large balance, it may not be suitable for some (See Figure 1 for a comparison of spending strategies). Take, for example, your clients who wish to leave behind as large an inheritance or bequest as possible. They may find it more desirable to adopt an approach that minimizes spending.


Figure 1: Spectrum of spending strategies

A graphic titled "Spectrum of spending strategies" shows the range of characteristics of each of three retirement income spending methods: Dollar plus inflation rule, dynamic spending rule, and percentage of portfolio rule. The three characteristics are "market performance," "spending stability," and portfolio viability," and each is represented with a bi-directional arrow to show the spectrum of traits associated with each spending method. For the "Market performance" characteristic: The dollar plus inflation strategy tends to ignore performance; the dynamic spending rule is somewhat responsive to market performance; and the percentage of portfolio rule is highly responsive to market performance. For the "Spending stability" characteristic: Dollar plus inflation is stable; the dynamic spending rule fluctuates within limits; and the percentage of portfolio rule is highly variable. For the "Portfolio viability" characteristic: The dollar plus inflation strategy is unpredictable in whether it will exceed or fall short of lifetime spending needs; the dynamic spending rule is more stable; and using the percentage of portfolio rule, the portfolio can not be depleted.

Source: Vanguard Investment Advisory Research Center.

Note: For illustrative purposes, we used the 5% ceiling and the -2.5% floor as an initial starting point because it provided a portfolio survival rate greater than 85% over a 35-year time horizon, however, we tested hundreds of ceiling and floor scenarios to determine the impact on portfolio success rates.

Let market-performance inform but not dictate retirement income

Consider sharing the video with clients to aid their understanding of dynamic spending and to assuage any existing concerns about timing their retirement date to market performance.

Sequence-of-returns risk—the risk of impairing one’s lifetime spending power by withdrawing during a down market early in retirement—is a valid concern for retirees. You might even hear it as clients voicing their unease about retiring into a potential market top, if they think their portfolio balance will plummet soon after because of market cyclicality.

Dynamic spending can mitigate the risk (and the worries that come with it) because the strategy adjusts the level of portfolio withdrawal based on market performance. In down years, the retiree spends slightly less than a previously determined baseline target amount. In years of strong performance, the retiree can spend more than the baseline amount. Dynamic spending prescribes a “floor” percentage for times of reduced spending so the retiree can meet their income needs; similarly, a “ceiling” percentage is set on extra spending in the high-performing years. Vanguard research has found (and the video illustrates) how relatively small and infrequent reductions in spending enable retirees to spend and enjoy more money overall during their retirement.

Make the dynamic spending video part of your client conversations

In demonstrating how it works, the video follows the portfolio journeys of hypothetical individuals with three different retirement start years: 1973, 1983, and 1993. From factors such as how financial markets were performing, to the state of the economy, to varied geopolitical climates, each of those years presented vastly different backdrops and considerations for retirees.

In each case, the retiree started with a $1 million, 60% U.S. stocks, 40% U.S. bonds portfolio.1 With a 4% initial withdrawal rate (plus inflation adjustment to the withdrawn amount in subsequent years) as the basis for comparison and an expected 30-year retirement, dynamic spending allowed all three retirees to receive more income (even considering inflation) without exhausting their portfolios. In practical terms for your clients, this could translate to enjoying a higher quality of life, however they define it: more travel, greater ability to donate, or perhaps having greater means to help family members financially.

For your clients with the flexibility to make small spending decreases in down markets and the desire to spend more in positive markets, dynamic spending could be a compelling strategy. It may be especially appropriate to discuss if clients mention recent market performance or current events as reasons for their trepidation about retirement. Having a conversation about it is good for your clients and good for your practice, as it’s a powerful initial step toward helping clients feel more confident about reaching their goals.

1 Hypothetical example. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Notes: Example is based on a 60% U.S. stocks and 40% U.S. bonds portfolio. Stocks are represented by the Standard & Poor’s 500 Index from March 4, 1957, through December 31, 1974; Wilshire 5000 Index from January 1, 1975, through April 22, 2005; MSCI US Broad Market Index April 23, 2005, through June 2, 2013; and CRSP US Total Market Index thereafter. Bonds are represented by Standard & Poor’s High Grade Corporate Index from 1926 to 1968; Citigroup High Grade Index from 1969 to 1972; Lehman Brothers U.S. Long Credit AA Index 1973 through 1975; Barclays U.S. Aggregate Bond Index 1976 through 2009; and Spliced Barclays U.S. Aggregate Float Adjusted Bond Index thereafter.


Related links:

Dynamic spending: A better way to budget in retirement

From assets to income: The Advisor’s Alpha® guide to retirement spending



All investing is subject to risk, including possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.

Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.

High-yield bonds generally have medium- and lower-range credit quality ratings and are therefore subject to a higher level of credit risk than bonds with higher credit quality ratings.

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