In a new paper, "From assets to income: A goals-based approach to retirement spending"? Vanguard researchers provide a framework to help investors turn an investment portfolio into a sustainable and consistent source of income.
Vanguard’s approach has three components :
- Developing a prudent spending rule. Vanguard researchers advocate for tailoring spending to a retiree’s unique goals using a "dynamic spending" rule under which annual spending is allowed to fluctuate based on market performance, but "smoothed" by applying an annual ceiling and floor to the amount.
- Maintaining a broadly diversified retirement portfolio. Vanguard researchers recommend building a balanced, diversified investment portfolio that focuses on total return rather than income.
- Implementing tax-efficient withdrawal strategies. With many investors holding taxable, tax- deferred, and tax-free accounts, Vanguard researchers suggest a withdrawal order strategy designed to minimize taxes, as well as to potentially increase the spending amount and a portfolio’s longevity.
"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. Vanguard’s framework can help investors negotiate the inevitable trade-offs between spending sustainability and stability", said Colleen Jaconetti, CPA, CFP, a senior investment strategist at Vanguard and co-author of the paper.
