Vanguard Research 4.75% Withdrawal Rate Dynamic Plan

[frugalman]

The link below is to a nice paper done by Vanguard Research. They compare some different actual methods of drawing on your investments in retirement. It appears their favorite is known as the Hybrid approach, which has these features:

4.75% initial withdrawal rate

Each year thereafter:
4.75%, except that the amount is capped at no more than 105% of the last years withdrawal (5% up cap) and no less than 97.5% of the last years withdrawal (2.5% down cap).

Their simulations show that this method will not run out of money in 89% of the 10,000 simulations over a 35 year period.

http://www.vanguard.com/pdf/icrmda.pdf

Oh and this was first brought to my attention by an MMM reader Rob Berger, at:
http://www.doughroller.net/retirement-planning/4-percent-retirement-withdrawal-rule-interview-with-vanguard/

[wtjbatman]

And you thought people here were confused by the 4% SWR. This is going to be a doozy.

[foobar]

If I understand it right, it would have sucked to use this approach in the late 70s/early 80s:)   You would have watched your standard of living drop by 1/3 and it wouldn't have bounced back until the late 90s. Meanwhile you would have a huge portfolio that your sucking out at 2% per year.

That being said I like the general approach as it cuts spending by ~5% (the cap + no inflation adjustment) in down years. Now that might be rough in a 3 year down market but it spending in those down years that really does you in.

The link below is to a nice paper done by Vanguard Research. They compare some different actual methods of drawing on your investments in retirement. It appears their favorite is known as the Hybrid approach, which has these features:

4.75% initial withdrawal rate

Each year thereafter:
4.75%, except that the amount is capped at no more than 105% of the last years withdrawal (5% up cap) and no less than 97.5% of the last years withdrawal (2.5% down cap).

Their simulations show that this method will not run out of money in 89% of the 10,000 simulations over a 35 year period.

http://www.vanguard.com/pdf/icrmda.pdf

Oh and this was first brought to my attention by an MMM reader Rob Berger, at:
http://www.doughroller.net/retirement-planning/4-percent-retirement-withdrawal-rule-interview-with-vanguard/