Link 2: OthalaFehu: Retirement Master Plan.Link 1: The Retirement Manifesto: Our Retirement Investment Drawdown Strategy.The Anchor: Physician on FIRE: Our Drawdown Plan in Early Retirement.I realize we are a bit late to the party given how many fellow bloggers have already contributed: 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.Fritz at The Retirement Manifesto suggested we start a series covering how different FIRE bloggers plan to implement their drawdown strategy. For example, our historical research† 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. And it enables you to weather bad markets without substantially reducing your spending.īest of all, dynamic spending can mean greater spending levels throughout retirement. This framework allows you to decide how much you want to benefit from good markets by spending a portion of those gains. 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. 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 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 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. Underneath the spending rules are 4 lines showing the different portfolio characteristics and how each rule impacts them. 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. This graph shows the spectrum of the 3 spending rules. But you don’t go any higher than the “ceiling” or any lower than the “floor” you set as part of your strategy. 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. 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. Your spending is more flexible than with a dollar-plus-inflation approach but also more stable than with the percentage-of-portfolio approach. In other words, it achieves a happy medium. 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. Since many people equally prioritize spending levels and portfolio preservation, we created a retirement strategy that achieves both important goals-covering current spending while aiming to preserve enough money for the future.ĭynamic spending-a hybrid of the dollar-plus-inflation and percentage-of-portfolio rules-does just that.
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