What are your thoughts about the “4%” rule?

The 4% spending guideline simply says that if you have a diversified portfolio split between stocks and bonds, you could safely withdraw 4% of your initial balance at retirement, adjusting the dollar amount for inflation each year thereafter. Based on historical returns for stocks and bonds, withdrawing 4% of your portfolio should provide a stable, inflation-adjusted income stream that could be sustained for 30 years.

One of the drawbacks of the 4% rule is that annual withdrawals don’t vary in response to market conditions. That means that if you have a $1 million portfolio, you’d withdraw $40,000 plus inflation every year no matter if the stock and bond markets (and hence the value of your portfolio) go up or down. If the markets have a longer period of lower returns, you’d run the risk of depleting your portfolio faster. On the other hand, if the markets perform well, you could safely withdraw more than the $40,000 and maybe have a more comfortable retirement.

Can you explain Vanguard’s three-pronged retirement spending strategy?

Developing and overseeing a retirement spending strategy can be difficult, so we created a three-pronged spending strategy that includes:

  1. Selecting a spending rule that balances current spending with preserving the value of a portfolio (to support future spending, leaving money to heirs, or other goals).
  2. Building a portfolio based on time-tested investment principles.
  3. Implementing tax-efficient investment and withdrawal strategies.
Each step involves complexities and trade-offs that need to be carefully considered so you can meet your unique goals.

(For assistance in creating your spending strategy, partner with a Vanguard advisor.)

What is the total-return approach to retirement spending?

When building an investment portfolio, there are generally two approaches: income-focused and total-return. These two methods are identical to a point—in both cases you’d use the cash flows generated by your portfolio first to meet your spending needs. But if you need to spend more than the portfolio’s yield, these two approaches differ. You could either reallocate your portfolio toward higher-income-producing assets, known as the income-focused approach, or spend from your portfolio’s appreciation, known as the total-return approach.

What’s the danger of focusing on income when making decisions on portfolio construction?

Our investing principles state that your portfolio should be broadly diversified and your asset allocation based on your time horizon, risk tolerance, and financial goals.

Some investors might consider reallocating their portfolios to focus on income by investing more heavily in dividend-paying stocks or higher-yielding bonds, for example. Since they’d likely be moving assets from lower-yielding bonds, like U.S. Treasuries, they’d be adding extra risk to their portfolio. We believe that increasing your portfolio risk and straying from a broadly diversified portfolio may actually put your principal at higher risk than simply spending from it.

How do I ensure my portfolio is tax-efficient? How does having a tax-efficient portfolio impact retirement spending strategy?

The tax efficiency of your portfolio is impacted by two things: the individual investments you purchase and where—or in which account type—you purchase them, also known as asset location. To ensure your portfolio is tax-efficient, you should try to purchase tax-efficient investments (such as index equity funds or ETFs) in taxable accounts and tax-inefficient assets (like taxable bond or active equity funds or ETFs) in tax-advantaged accounts.

You should focus on your portfolio’s tax efficiency because every dollar paid in taxes is a dollar less you’ll have to meet your retirement spending needs.

How do you adjust spending strategies to account for market conditions?

Two spending strategies that take market performance into account when determining annual spending are “Percent of Portfolio” and “Dynamic Spending.” With the Percent of Portfolio strategy, you’d spend a fixed percent of your portfolio balance each year. That amount is increased or decreased to reflect market performance. While your portfolio won’t be depleted, your annual spending amount can fluctuate significantly, which could present a challenge if your nondiscretionary or fixed expenses (housing, food, etc.) are a relatively high proportion of your total expenses.

To address these potential trade-offs, we developed a hybrid strategy, Dynamic Spending. With this strategy, annual spending is allowed to fluctuate based on market performance while at the same time limiting significant fluctuations in spending from year to year. We recommend setting a ceiling (a maximum amount) and floor (a minimum amount) to each year’s spending amount, calculated annually.

For example, we considered a ceiling of a 5% increase and floor of a 2.5% decrease in spending from the previous year. When the markets perform well, you could withdraw up to the ceiling amount, giving you more money to enjoy. However, if the markets perform poorly, you could reduce your spending amount down to the floor amount and still feel like you won’t risk depleting your portfolio too soon. Read our recent research paper for more information on this topic.


All investing is subject to risk, including the possible loss of the money you invest.

Diversification does not ensure a profit or protect against a loss.

We recommend that you consult a tax or financial advisor about your individual situation.

Investments in bonds are subject to interest rate, credit, and inflation risk.