Spending in retirement can be just as important as saving for retirement, especially in the current low-return environment. With that in mind, Vanguard, the giant mutual fund company with more than $3 trillion in assets, has developed a goals-based approach to retirement spending designed to turn an investment portfolio into a “sustainable and relatively consistent” source of income for retirees.
Traditionally, many retirees followed the 4% rule, withdrawing that percentage from their portfolio annually, but that approach has been losing currency lately given the relatively low yields that portfolios collect in the current market and probably for years to come. A 50/50 stock/bond portfolio as well as a portfolio comprised solely of bonds yield only 2% today, according to Vanguard.
Investors can try to make up the difference, reaching for yield by either lowering the credit quality or increasing the duration of their bond portfolio, which increases its credit or interest rate risk, respectively, or they can add more dividend-paying stocks to the portfolio, which can reduce diversification. In either case, they still may not earn enough in their portfolio to justify a 4% withdrawal rate.
A better strategy, said Vanguard, is to adopt a “goals-based approach to retirement spending.” This approach “can help investors negotiate the inevitable trade-offs between spending sustainability and stability,” said Colleen Jaconetti, a senior investment strategist at Vanguard, in a statement.
Jaconetti is a co-author of a report, “From Assets to Income: A Goals-Based Approach to Retirement Spending.”
“The stakes in retirement are high, and the impact of suboptimal decisions can be severe, particularly taking into account the unknowns, such as market returns, life span, and health issues,” said Jaconetti.