4% Spending Rule Still Feasible

A 4% spending goal may still be a reasonable starting point for investors who follow a total-return spending approach, a research paper concludes.

Vanguard’s “Revisiting the ‘4% Spending Rule’” explains that a total-return spending approach is an approach in which investors remain properly balanced between stocks and bonds, and diversified within asset classes, so that their portfolios can potentially benefit from both dividends and capital appreciation. As an example the paper states, instead of attempting to alter their portfolios by overweighting bonds, increasing bond duration, or overweighting income-yielding stocks, investors using the total-return approach allow for spending both from portfolio cash flows and from the potential increase in their portfolios’ value. 

According to the report, the current low-yield environment that retirees are facing is much different from the investment climate of 30 years ago, which has important implications for the amount that a retiree can safely expect to spend annually from a portfolio without jeopardizing its durability.    

Vanguard believes it is important for investors to consider real-return expectations when constructing portfolios, because today’s low stock dividend yields and U.S. Treasury bond yields are, in part, associated with lower expected inflation today than 20 or 30 years ago. Specifically, Vanguard’s market and economic outlook indicates that the average annualized returns on a balanced 50% equity/50% bond portfolio for the decade ending 2021 are expected to center in the 3% to 4.5% real-return range.


Although this level is moderately below the actual average real return of 5% for the same portfolio since 1926, it potentially offers support for the continued feasibility of a 4% inflation-adjusted withdrawal program as a starting point for balanced investors, the researchers contend.  

Keeping in mind the relationships among key variables such as time horizon, asset allocation and portfolio success rates, an investor can develop a customized spending rate that provides the highest probability of meeting his or her long-term goals. The analyses in the paper illustrate sustainable withdrawal rates can range from 3% of a portfolio (for conservative investors with long time horizons) to more than 9% (for more aggressive investors with shorter time horizons)—all with a high probability of not depleting assets during the specified time horizons.   

The researchers note that each investor’s situation includes unique circumstances that can affect portfolio spending and sustainability.  

The report can be downloaded here.