The Vanguard Dynamic Spending Rule: A Closer Look at Its Pros and Cons
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- Опубліковано 6 сер 2024
- The Vanguard Dynamic Spending Rule is one of several retirement withdrawal strategies that use the guardrails concept. The idea, in theory, is to generate a spending plan that has some of the annual spending consistency of the 4% Rule, while at the same time remaining sensitive to market fluctuations.
In this video I'll walk through how the rule works, its pros and cons, and a free tool that will enable you to test the Vanguard Dynamic Spending Rule for yourself.
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ABOUT ME
While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I'm the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
I'm also the author of Retire Before Mom and Dad--The Simple Numbers Behind a Lifetime of Financial Freedom (amzn.to/3by10EE)
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This is a great analysis, I've watched a number of other videos on this subject and this is the clearest by far. It's really important to see how much spending can actually drop by. As in many cases that are "successful" in not running out of money they're not really successful as a retirement plan as the spending is cut by so much. Thanks for the thorough explanation
Rob: Good stuff. Excellent explanation of VG Dynamic Spending System. I did FiCalc on my personal situation. Very interesting. $1M to start. 30 years in retirement (although I am 72, so unlikely) 5% w/d. 5% Ceiling (and $60,000 max) and 5% Floor ($30,000 Min) 100% Success. 87% Over maximum. Planning to retire 6-30-2023.
HELLO!!!
Here we are one year in the FUUUUUTUUUURRRE!!!!!
How has retirement been treating you?
Thank you for explaining this. Your examples were very helpful.
I think the Guyton/Klinger withdrawal rate rules deserve a look. I see mention of it in the comments. Jonathan Guyton did an interview in July 2020 on Morningstar's The Long view and explained his process and the application of it to retirement portfolios. Well worth the time.
Greetings from Malaysia. Thank you Rob, love your video and analysis So insightful and inspiring and beneficial. :)
@Rob Berger nice job.
Concur with the numerous comments Rob - excellent video especially for many of your viewers (myself included) that utilize Vanguard. I had Vanguard imput a specific amount of $$ for end of plan. As you noted - dynamic spending plan is successful if you have any money left. I believve one of the best withdrawl strategies is one you covered in a previous video - RMD withdrawl rates. I am 70 and the plan is to pursue that strategy when I turn 72. Retired at 60 and have averaged 2.5% however I am fortunate that I have a pension and SS that afforded me to be very conservative. Rob - Keep doing what you are doing. I also find hyour weekly news letter has some great nuggets of info !
Your average return has been 2.5%?
That's Abysmal!!!!
That's Not even keeping pace with Inflation!
And if you're fortunate to have a Pension then THAT is your conservative portion of your "portfolio" so to speak!
While I'm not saying you need to be 100% in Equities, I am saying,
You need someone a lot smarter than you to advise you on where to put your Nestegg!!
At the very least, seek out a fee only Investment Advisor!
You really don't understand what is going on.
The 10 Year Return of the S&P 500 was at 178.6% This is higher than the long term average of 115.0%.
Ie: You left A LOT of money on the floor over this past decade!
I think the ABW (Amortization Based Withdrawal) that I found on the Boglehead's forum is the best for me and really easy to comprehend too.
We have been trying to understand the Vanguard Dynamic Spending rule since I began using them as a Personal Advisor a few year now. None of their advisor's has been able to explain it clear enough to me. Thank you for your examples on the this and your teaching it in a clear manner.
80k subscribers, congratulations Rob!
Almost 81
@@midnightsun24c7 82K now
190k now!
That's awesome!
@@noreenn6976 It is fun to watch good channels grow. Of course crappy channels grow for being excessively crappy, but hey, I watch at videos too!
Fantastic video. Thanks for the information. I am a Vanguard customer and was wondering how this really worked. You mentioned it’s not a strategy you would use. What strategy would you use?
So helpful as always, Professor Berger. After looking at all these different strategies, it seems like the best one is (1) starting with a conservative withdrawal rate (like 3%) if you can afford to and (2) using some common sense, informed by a good retirement planner like New Retirement, to see if you need to pare back spending. These strategies also need to account for the gap years between retirement and Social Security (62 to 70). Mike Piper has an interesting plan for that, involving setting aside money from the rest of your portfolio. And then there is the idea of setting aside some money from your portfolio to anticipate long-term care needs. Good luck, average retiree!
I think the Vanguard Dynamic Spending rule is the best you going to get especially if you value making the most of all your money (not leaving it behind when you leave the planet). I think the analysis at the end is a little deceptive. Look at the difference between the median spend of the VDS and the percent of portfolio median. Or look at the average spend between '75 and '85. The VDS recognises that the percentage of portfolio rule is the way to go, but you don't have to panic if the market drops, you can work you way down.
Great video, Rob. Appreciate the demo of FICalc and your analysis.
Very helpful video. Thank you for posting.
interesting, I can see how people that like to do math would follow this! I expect to retire this year, wife already retired. I think we'll do something simple like take 4%, if market was good increase $10k, market bad subtract $10k. soc sec will provide $50k base anyway.
When do adjust for inflation?
Excellent session! None of these formulas are hard core rules, but this suits a LOT of things I have been noodling over (in my head) and starts applying benchmarks
I think mixing this up with Retirment Manifesto’s idea of adjusting the ceiling and floor, based on just how big the market fluctuates each year, would get even closer… I guess I’m making it even more convoluted.
I’m all in on doing the homework each year .. I speak excel. Once you reach RMD age, you have tokeep track of these things, anyway.
Speaking of floors, your 2.5% might not meet the RMD requirements … I would make the floor the RMD minimum requirement. If you are not yet RMD age, make sure your floor is less than the RMD requirement.
Nice job today Rob.
Hi Rob, great video and really useful. Are you planning to do a video on Michael McClung retirement strategy? It looks good to me but would value seeing you break it down. Thanks Spencer
Rob: This was so incredibly helpful. I hope you’ll keep doing more videos like this where you show the math and also the charts and how to use the retirement calculators. In this case, having you discuss and compare the different retirement draw down strategies while doing that was immensely helpful. Cheers!!
When is that tax software video coming out? I can't wait.
Interesting
Why is there a floor? Why would one not spend less if one could?
What about taking social security into account? If my spend if $50k per year and my SS is 36k a year…
Appreciate your analysis, as always, very thorough but seems way too complicated. One's retirement years, in my mind, will be much like one's working years, always different...so be vigilant, flexible and embrace that notion that life is dynamic. There will always be good times and bad, act accordingly.
Good video! What would say are the advantages & disadvantages of the Vanguard approach versus Guyton's Guardrails?
Thanks Rob - there is a good article on this approach in WSJ (June 1, 2015 - "A Better Way to Tap Retirement Savings") that gives this topic some justice also - does not refer to Fidelity though(?))
Great video - thanks!
Brian
Very interesting, thanks Rob!
Great job explaining this concept. The $1M portfolio examples always go a long way in clearing up concepts.
wasn't 4% rules success rate for 30 yrs at 96% vs 85% for this Vanguard dynamic spending strategy? the guyton klinger rule seems easier to calculate and the succes rates higher 99% for 65/25/10 and 80/10/10(equities,/bonds/cash) with an intial withdrawal rate of 5.3 and 5.6% respectively.
Rob, you say 4% is a "fixed $ amount strategy" - spending same $ amount each year, but I wonder if it is so. I mean how can it be fixed $ amount if it's spending 4% of the capital that goes up and down all the time!? Even if the capital is fixed and doesn't change from year to year, the fact that we withdraw 4% of it every year, means the capital is reduced next year so either the spending next year has to be lower to stick to 4%, or we spend a bigger percentage to keep the $ amount the same.
I see it this way: we spend 4% of the capital sum each year whatever it is and the $ amount of spending could drops a bit some years or be a bit more than last year, this works fine over long term if capital grows by at least 4%, what do you think?
The rule says that you always spend 4% of your initial capital, adjusted for inflation, not of your current capital.
@@michaelwinter5281 Thanks for your comment. it seems you're saying the amount is increased every year to keep the spending power fixed at 4% of initial capital, did I get you right?
Rob, I prefer to adjust monthly to the balance of my portfolio. I hate making an assumption of a fixed monthly withdrawal based on what you ended the year with.
The Vanguard DSR is way too complicated for what it does. When I comparison tested it to an old school 4% of your portfolio rule, it didn't produce dramatically different results, so why bother with all the crazy guard rail stuff? Seemed to me like it was a rule designed to shift people away from self directed accounts to managed accounts to generate an extra 0.30% in fees. If Vanguard thinks it's such a great rule they ought to give away a calculator on their website (or at least have a link to FICalc)
and excellent video
Seems pretty different than a constant percentage rule to me! :) If the portfolio falls 30% in a big crash, this keeps the rule from indicating that the next year's withdrawal should be more than 30% smaller.
I like the V D S it's easy and simple to implement but, the 4% rule is better and easier & might beat out the VDS ?
It seems to me that we have lots of methods and “rules”. In essence all of the methods described use a dynamic approach of some type. Rebalancing your portfolio, is a dynamic strategy, to lower risk. So is the bucket strategy or the guardrail strategy.
Would I spend my dividends and then also do this calculation, or do I have to reinvest my dividends and then do the calculation?
Great analysis Rob. One question I have about FiCalc is that spending seems off if you have an inflation adjusted pension. Let's say you currently have a 30K pension, wouldn't that mean spending would never be below 30K. I'm getting minimum spending below that figure. How does this work?
Which note app is Rob using with his pencil? I have tried a couple and they aren’t as clean and easy as what he’s using
I think as a modeling strategy this is good. In general if the stock market is down you are probably going to be looking at your budget to cut corners, and when the market is high you are going to be more carefree in your spending. One aspect that bothers me about all of these analysis is that it assumes that inflation is increasing at a continuous rate when in fact it should be treated statistically just like the other parameters. Over time your property taxes might be tracking inflation, but most years it may not change much. Same for other factors, costs can go up and down while they are statistically likely to increase. This can be important because if we have a few years of high inflation that are correlated with bad market performance then that is where we really need to tighten our belts, but if inflation and the markets are increasing together, then the risks are obviously reduced. In the end we need to stress test our plan, but as we execute our plan we need to continuously reevaluate our situation. What was *my* inflation this year. If it wasn't so much, no need to withdraw more just because it was part of the model we used to estimate our risks.
Hey Rob, question about 401k contributions here. I want to get my contribution into a total market or S&P 500 fund, but all of my options look like they require minimums to invest (i.e. $3,000 minimum for the vangaurd funds). The only ones that don't are the fidelity target date funds for 2060, but I don't care for them (especially seeing their performance the last 8 years). Can I contribute to the S&P 500 with my monthly contribution of much less than $3000?
Rob, would you talk about Equal Weight indexes such as RSP in a future video? I can see that it outperforms the market cap weighted index and seems to be less volatile.
Another wrinkle for me, and probably many of your viewers, is RMDs. I’m still working at 70 but will probably quit when RMDs kick in at 73. All employer retirement accounts will be consolidated into my three index fund rollover IRA where the withdrawal rate will be out of my control. RMD + social security will probably exceed my spending needs in most years so I need a plan to efficiently manage the excess.
Jeez, if you’re not retiring til 73, I’m pretty sure your Nursing Home costs will quickly eat away at any “excesses” you may THINK you’ll have.
The only thing RMD's do is force you to move assets out of your IRA. You don't have to spend them. Most brokerages will let you take distributions in-kind, so you can just shift your IRA assets to a taxable account and maintain the same overall allocation.
As for nursing homes, my dad lived independently to the day he died at age 97. Played tennis up to age 95. I got half his genes so I’ll use the mortgage-free house to pay for long term care if it comes to that. For the excess RMD income, I suppose I could park some in a T bill ladder to cover other high cost years, like when a car needs replacing, or other unanticipated big ticket items.
@@venkdaddy since you have to pay taxes on them, the net effect is not dollar for dollar saving or same overall allocation is it?
hmm, i wonder if the inputs were in correct. your withdrawal rate is set at 5%, and never decreases by more than 2.5% of previous year withdrawal, and never increases by more than 5% of previous year withdrawal. That doesn't seem to actually replicate VDSR, since 5% increase of 5% is higher than the 5% ceiling, and 2.5% decrease from floor, would be lower than the 2.5% floor, since the variable is of previous year withdrawal. So, seems like you are ever expanding the actual 2.5%-5% range, or am I just confused on the wording. VDSR you would not exceed 5% ceiling or 2.5% floor.
That's interesting, I wonder what fiCalc uses. Is the floor and ceiling calculated from the inflation adjusted numbers or the raw numbers. Rob uses the inflation adjusted for last year's spend in other examples I have seen them use the raw numbers of last year's spending for the floor and ceiling.
Beautiful Video ❤️ I think the pandemic and economic crisis have taught people the importance of multiple streams of income, unfortunately having a job doesn't mean financial security. I really appreciate the transparency and giving people a fighting chance during these troubling times.
Interesting review. We’re Vanguard account holders. In 2019-21 we were careful to stay disciplined not to over spend when the market was exploding. Then 2022 took us all the way back to Jan 2019. The system generally worked but we were blindsided by the steep decline n bonds. It’s been unsettling.
With formulas and " guardrails ", isn't this against the concept of kiss. Keep it simple?
It is a bit more involved. I suspect most retirees implement some form of guardrail anyway. It's just in most cases it's not reduced to a formula. Instead, if the market is down, we spend less. If the market is up, we spend more.
In the 1960s cars added seat belts and then regulations required them. Eventually requiring shoulder belts, shock absorbing bumpers, crush zones, door reinforcement, passive restraints like air bags, anti-lock brakes, tire pressure monitoring, even more air bags, and etc. This is not to keep it simple, this is to make it more safe without turning cars into something resembling the flintstones foot powered vehicles.
Do you want safety to not run out of money? Simple, don't spend from your portfolio. Or add safety with some complexity.
This is just another point of view. If you invest in stock market index and withdraw say 3.5%. Index with inflation, per portfolio visualize, you will not run out of money
@@michaelreiser1326 The less you take out each year, the less likely to run out. Most people want to spend more. Dynamic spending with guardrails is an approach to maximise spending AND not run out of money.
Hi Rob, A very helpful video. I have learned a lot from you. I think another interesting vid would be to focus on a yearly flat rate taken from our portfolio(as you touched upon), With minor changes on years where market has fluctuated greatly. This may be the safest approach. Also one of the simplest to implement....as we grow older simplicity may be a good thing. It would be very interesting to see some sort of backtesting on such a method.
Rob: Today I came across the FINRA Fund Analyzer. It looks like an interesting tool - I've only spent a few minutes using it so far. Perhaps it is worth is worth a review in a future video.
If you live a long time you might be in trouble. If you don't....... You won't.
If CDs are 4-5% and you withdrawing under 3%, no risk. Seems simple once in retirement.
No offense intended, but the value of the cash in CDs has and is quickly being eroded due to inflation. More than 4% annually. I don't have a sure investment than is guaranteed to generate high returns and personally try to stay diversified.