• Recent market volatility and rising inflation has put retirement spending plans in jeopardy.
  • Traditional spending strategies in retirement sacrifice either short-term stability or risk early depletion.
  • Advisers can add significant value with a sustainable spending strategy that also offers retired clients valuable flexibility.


Market downturns can be unnerving even for seasoned investors, while the feeling may be more acute for clients approaching or in retirement. For those clients, the simultaneous downturn in global equity and bond markets in the first half of the year was particularly alarming.

Global bonds posted their worst first-half return in decades1 as yields jumped on the back of rising interest-rate expectations, while equity markets posted negative double-digit returns2. Add to this rising living costs, fuelled by the war in Ukraine and the ongoing energy crisis in Europe, and the picture for retiring investors looks incredibly challenging.

For these clients, the drop in markets and ongoing volatility may put their long-term spending plans in jeopardy as every withdrawal turns a negative return, which is temporary in nature, into a permanent reduction in the portfolio’s value – and the portfolio’s capacity to meet the client’s long-term retirement spending goals.

Given the scale of the challenge facing retired and near-retired investors today, advisers have a central role to play in helping clients meet their goals. With a clear idea of how much the client needs to meet their income needs and a sustainable, efficient spending strategy in retirement funded by a well-diversified multi-asset portfolio, advisers can add significant value for retiring investors.

Calculating how much clients need to retire

For clients approaching retirement, rising living costs may also require some adjustment to the amount of income they may need and therefore the savings they need to retire. Replacement ratios work as a rule of thumb to estimate what percentage of a person’s pre-retirement full-time income will be needed to maintain their lifestyle in retirement.

The ratio considers the client’s final full-time salary, pension income, savings, tax and regular expenses to calculate a desirable annual spending budget in retirement (as a percentage of final full-time salary). However, Vanguard recommends advisers build on these ratios to design more personalised budgets and help clients adjust, where necessary, their saving and spending habits in the build up to their retirement.

Sustainable spending in retirement

When in retirement, clients typically benefit from a disciplined spending strategy that provides short-term stability and long-term sustainability. However, traditional spending strategies, including the ‘dollar-plus-inflation’ rule and the ‘percentage of portfolio’ rule, have their flaws.

The dollar-plus-inflation rule, for example, involves setting an annual spending budget and then increasing it each year in line with inflation, which provides a high level of certainty regarding annual spending, at least in the short term, but risks early depletion of funds, especially following a run of poor returns3 – or high inflation, as we face today.

The ‘percentage of portfolio’ approach keeps annual spending at a predetermined proportion of the portfolio. That means the pot never runs down to nil (although it may not be enough to cover spending requirements), while the client’s annual spending power will fluctuate according to market returns4. In the current climate, with markets highly volatile, clients may prefer greater stability.

This is where Vanguard’s ‘dynamic spending rule’ offers a hybrid of both approaches – short term stability and sustainable spending power over the long-term. Essentially, the dynamic spending rule makes modest adjustments to withdrawals in response to market performance, limited by a ‘ceiling’ and ‘floor’ for maximum and minimum spending budgets. This helps to protect the portfolio’s ability to withstand market swings. See the graphic below for a high-level summary of the three approaches.

Comparison of spending strategies

Initial annual spending amount $ 50,000 5% ceiling, - 2.5% floor 5% of portfolio
Market performance Not affected Somewhat responsive Very responsive
Short-term spending stability Stable Fluctuates within stated limits Unstable
Spending flexibility Not flexible More flexible Highly flexible
Portfolio viability (success rate) Unpredictable More stable 100% success rate

For illustrative purposes. Positive outcome from spending strategy Negative outcome from spending strategy.
Source: Vanguard.

The goal of the Vanguard’s dynamic spending rule is to keep annual real (inflation-adjusted) spending relatively stable while also preserving portfolio longevity.

Withdrawal order

Withdrawing money in a tax-efficient manner is also important. Advisers who implement informed withdrawal order strategies can minimise the total taxes paid over the course of their clients’ retirement, thereby increasing their clients’ wealth and the longevity of their portfolios. Vanguard research in the US and UK5 has shown that this process alone can represent a significant proportion of the advice value proposition.

Delivering value

Advisers can play an important role in helping investors achieve their financial goals over the course of their investment journey. With markets volatile and living costs rising, advisers have an opportunity to demonstrate the lasting value that good-quality advice can provide for investors approaching or in retirement.


1, 2 Source: Vanguard calculations, based on data from MSCI and Bloomberg. Global equities represented by the MSCI All Country World Index (in EUR). Bond performance derived from the Bloomberg Global Aggregate hedged in Euro’s index from 1990 to 30 June 2022 (in EUR). Year-to-date returns as at 30 June 2022.

3, 4 Source: See Sustainable spending in turbulent markets, Daga, Clarke and Pakula, March 2021.

5 For more information on our research based on the US and UK retirement landscapes, please see the research papers From Assets to Income: A Goals-Based Approach to Retirement Spending, 2016 and Withdrawal Order: Making the Most of Retirement Assets (Harbron et al. 2019.)

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Important information

This document is directed at professional investors and should not be distributed to, or relied upon by retail investors.

The information contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this document does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this document when making any investment decisions.

The information contained in this document is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.

Issued by Vanguard Investments Switzerland GmbH.

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