4% Retirement Withdrawal Rule–An Interview with Vanguard’s Maria Bruno and Colleen Jaconetti

Vanguard InvestmentsWhat do retirement planning professionals from Vanguard have to say about retirement topics like the 4% rule? In today’s podcast I interview two investment analysts at Vanguard with over 35 years of combined experience – Maria Bruno, CFP and Colleen Jaconetti, CFP. We talk about everything from the 4% rule to portfolio balancing issues to annuities for retirees who want guaranteed income.

Maria and Colleen are true retirement experts who have run studies and written about retirement planning for years. Be sure to check out the resources from Vanguard that I link to at the end of the article. So, without further ado, here’s the transcript from the interview:

Rob: Maria and Colleen, welcome to the show.

Colleen: Thank you, Rob.

Maria: Thank you.

Rob: I’m thrilled to have you both here to talk about retirement and retirement investing and spending. Before we jump into it though, can you guys just give me a little bit of your background. Maria, perhaps we can start with you?

Maria: Sure. I am a Senior Investment Analyst with Vanguard’s Investment Strategy Group. I am also a certified financial planning professional. I’ve worked with financial planning clients for well over a decade. I’ve been in the financial services industry for over 20 years. But a lot of the work I’ve been doing has been around financial planning strategies, particularly with retirement planning and retirement strategies.

Rob: Great. Colleen?

Colleen: Yes. I too, am a Senior Investment Analyst with Vanguard’s Investment Strategy Group. I’ve been with Vanguard for over 15 years. I’m also a certified financial planner, as well as a certified public accountant. My primary focus has really been working on the advice methodology at Vanguard, specifically focusing on retirement income.

Rob: You two are the perfect folks to talk to about retirement and, again, I’m thankful for your time.

I get a lot of questions from listeners on the topics we’re going to cover. Obviously they’re very important topics for folks’ financial future as they near retirement and enter retirement, so let me just jump right into it.

4% Rule of Retirement Spending

I want to begin with a very popular ‘rule of thumb,’ and that’s the 4 percent rule of retirement spending. Can you guys sort of start off by describing for us just what that is?

Maria: Sure. The four-percent spending rule is really a rule of thumb, and there’s been a lot of researchers who have done work on this—Vanguard included. Both Colleen and myself have done work on this.

What it’s set out to do is, it’s set out to be a guideline for individuals who are starting out in retirement, to give them a framework in terms of what a sustainable portfolio spending rate could be throughout retirement. So, there are a couple factors that come into play, one being asset allocation.

Most of the studies out there, including ours, assume a balanced portfolio anywhere from 40 to 60 percent equities. And what we do is run simulations. In our situation we do Monte Carlo simulations, and we look at different risk return horizons. And 4 percent seems to be a good starting point to give a strong likelihood for the portfolio not being depleted over a 30-year time horizon.

So, I think when we talk about the 4 percent spending rule, two factors come into play which are paramount. For instance, the asset allocation and the other one is the time horizon. I bring that up because I think there is a lot of focus on the 4 percent spending rule of thumb, but you need to keep in mind the time horizons.

For instance, if you have someone who’s starting out retirement much earlier, say in their 50s, then they would want to err on the conservative side and maybe have a lower initial withdrawal rate of about three percent. On the flipside, someone who is in advanced retirement, maybe in their 80s shouldn’t necessarily be tied into a 4 percent spending rule. So there is flexibility around that.

I think we’ll use that term a lot during today’s discussion, but it’s meant as a starting point. There’s been a lot of interest in this figure in today’s environment because of the low-yield environment and recent global financial crisis as well, so there’s a lot of interest in this figure.

It is a rule of thumb. We at Vanguard do believe it’s still a viable starting point, but there are a lot of factors that come into play when thinking about that figure.

Rob: Okay. Let me put some actual dollars on this. Let’s say someone had a portfolio for retirement of $1 million. Under the 4 percent rule, in year one of retirement they could withdraw $40,000?

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7 Responses to “4% Retirement Withdrawal Rule–An Interview with Vanguard’s Maria Bruno and Colleen Jaconetti”

  1. Venkat santosh

    I fountd the discussion very interesting and useful. I had been working on the philosophy of the 4% rule of withdrawal to determine how much I need at retirement. This article changed my thought process somewhat in that I could adjust my spending each year depending upon market performance with appropriate ceilings.
    One comment though- in your question you say “eluded” when you actually meant to say ” alluded”. I suspect it was a mistake in transcription.

  2. Kenneth

    Rob, I enjoyed your podcast interview with Colleen and Maria of Vanguard this morning. I’m retiring in 644 days.

    I would like to read more about the link you posted “A more dynamic approach to spending for investors in retirement” but the page the link brings me to doesn’t seem to contain the material.

    People talk about the 4% safe withdrawal rate as a good starting point. But there are so many variations that are never discussed. I’m glad the interviewees pointed out that technically, you can NEVER run out of money if you are withdrawing 4 percent of the remaining balance once each year. I think many people think of computing the number once, like $20,000 on a $500,000 portfolio, and then withdrawing $20,000 once a year every year thereafter.

    I am very interested in their Hybrid approach, which I’d like more information on. You’ve immediately reduced the portfolio to $475,000 after your initial withdrawal. Year two comes along, and the portfolio is flat. Do you take out another $25,000, or do you reduce the draw by 2.5% in this case, to $24,375? What’s the rule for the decsion on +5 ceiling, -2.5 floor?

      • Kenneth

        Thank you so much, Rob. The document is very helpful.
        I now understand the ceiling and floor concept.
        Let’s say 5% withdrawal rate, 5% ceiling, 2.5% floor (this should last 30+ years 85% of the time according to the article) from a $1,000,000 portfolio.
        Year 1 withdrawal $50,000
        Year 2
        Stocks decline, and your remaining $950,000 becomes $850,000 by year 2.
        5% of $850,000 is $42,500. Compare this to the 2.5% floor from the prior year withdrawal, which would be .025*50000 or $1,250 reduction giving a floor of $48,750. You withdraw $48,750.
        Year 3
        Stocks rise, and your remaining $801,250 has appreciated back to $1,000,000. 5% of $1,000,000 is $50,000. Compare this to the 5% ceiling from the prior year withdrawal, which would be .05*48750+48750 or 51,187.50. Your withdrawal rate did not hit the ceiling, so you can take the full $50,000.
        Year 4
        Stocks rise again, and your remaining $950,000 has grown to $1,200,000. 5% would be $60,000, but the ceiling is 1.05*50000 or $52,500, so that’s all you take out.

        Their main example is 4.75% withdrawal rate, 5% ceiling, 2.5% floor, which would have an 89% portfolio survival rate over 35 years. I like those odds. I like the 4.75% rather than the standard 4.00% safe withdrawal rate. I would be able to hunker down for a year or two with NO withdrawals if we are in a big bear market, because of social security and other income. So I think I’m going to go with this.

        Thanks again, Rob.

  3. David Pee

    What do you think of having enough of your assets in a “very liquid” form, say enough for 5,6 years and in money market or very short term investment grade bond fund etc. After that, invest the rest of your money, a bit more aggressive then what your typical tolerance template calls for. When I say 5,6 years in a “liquid form”, I mean that you can draw on this bucket of assets for 5,6 years to supplement your income requirements above and beyond your other retirement income.

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