The Increasing Withdrawal Plan

If you want to be sure something is left when you die, here s a plan that will work for you. Harvard University s endowment fund developed a spending guideline in 1973 to ensure a person wouldn t prematurely run out of money. The rule assumes a balanced portfolio allocated half to stocks and half to bonds and cash equivalents. It limits the first-year withdrawal to four percent of the portfolio s total value. Then, in each following year, increase this amount by the previous year s rate of inflation. Continue in this manner from year to year. For example, if you have a 500,000 portfolio, you could withdraw 20,000 in the first year. If the rate of inflation were 3.5 percent that year, you could withdraw 20,700 the second year. 

Even in the high-inflation, poor-return environment of the 1970s, this guideline allowed a retiree to withdraw more each year, in line with inflation, without depleting savings. 

Today s computer technology makes it easy to combine this approach with one designed to deplete capital. With assumptions on inflation, rate of return, and longevity, a withdrawal schedule can be set up. Such a schedule will increase each year by your assumed rate of inflation and carry you through the specified number of years. With such a spending plan, it is imperative that you monitor your assumptions and make adjustments as required. One simple way to do this is to calculate a capital balance for each year into the future. Then, compare your actual balance to this figure. 

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