The Dynamic Spending Rule synopsis:

To implement the dynamic spending rule, a retiree would calculate each year’s spending by taking a stated percentage of the prior year-end’s real portfolio balance. The investor would then determine a ceiling and a floor by applying chosen percentages to the previous year’s real spending amount, such as a 5% ceiling and a –1.5% floor, and compare the results.

If the new spending amount exceeds the ceiling, then spending will be limited to the ceiling amount. If it falls below the floor, spending will be maintained at the floor amount. Spending can therefore be made relatively consistent while responding to financial market performance to safeguard the portfolio’s health. Because outcomes are significantly affected by the selected ceiling and floor percentages, the strategy can be tailored to each retiree’s goals.

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Written By: David Pakula, CFA

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