Step 4. Adopt a spending policy
A fixed withdrawal amount that holds true even when markets sharply decline is bad policy for retirement income portfolios, according to Thornburg’s findings. A fixed 4% withdrawal might seem like plenty during strong years for the market, but when investments are down, a high withdrawal rate will eat through the portfolio much faster.
Instead, Thornburg recommends that retirees consider tying some of their withdrawal percentage to the performance of the portfolio. “A decrease in the spending amount during an extended bear market is a vital concept for improving the sustainability of a retirement portfolio,” according to the paper.
Two factors for retirees and advisers to consider when coming up with such an investment policy: the client’s spending rate and a smoothing rule that would tweak the spending amounts based on investment performance.