This 29-percentage-point improvement was more striking than that for partial-bear-market retirees, although they still saw an improvement of 12 percentage points. So the dynamic-spending approach is particularly effective for those worst hit by sequence-of-returns risk.
These better outcomes do require a reduction in the income received during bear markets.
This is, however, relatively modest. In the first five years of retirement, the average full-bear-market retiree experienced a 4.5 per cent shortfall in income while the average partial-bear-market retiree actually had an income surplus of 2 per cent.
This surplus is because dynamic spending revises income up in tandem with any rebound in market returns.
How did our 1973 retiree fare under dynamic spending, using the formula outlined above? Instead of running out of money after 23 years – a catastrophic result – their portfolio would have lasted the full 35 years, with their portfolio still 50 per cent intact.
A valuable tool for safeguarding retirement
By introducing a gradual reduction in income during falling markets, the dynamic-spending approach leaves more of the portfolio invested to benefit from an eventual market rebound.
This goes a considerable way towards mitigating sequence-of-return risk and translates into more wealth left at the end of retirement.
These improvements require only a modest reduction in income in the short-term compared with a fixed-spending strategy. Over the long term – the full 35 years of retirement – there is no significant difference to the income received in comparison with the fixed-spending approach.
This, we believe, makes a dynamic-spending strategy a valuable tool for safeguarding retirement. By guarding against the prospect of depletion, dynamic spending can offer retirees greater peace of mind.
Ankul Daga is a senior investment strategist at Vanguard Asset Management
