Investing Blog Roundup: Smoothed RMD Spending Strategy

The strategies for determining how much to spend from a retirement portfolio each year exist along a spectrum:

At one of the spectrum are strategies that spend a certain dollar amount (or more often, a certain dollar amount, which is then adjusted for inflation each year). The classic “4% rule” strategy is in this category. Strategies like this provide for predictable spending but allow for potential portfolio depletion if investment returns are poor (especially in the early part of retirement).
At the other end of the spectrum are strategies that spend a percentage of the portfolio each year. Strategies in this category are safer in the sense that they cut spending when portfolio performance is poor and thus reduce/eliminate the possibility of depleting the portfolio. But they can result in dramatic volatility in spending from year to year.

And so there are also hybrid strategies. In an article for Kitces, Michael Woloch recently discussed a “modified RMD” spending strategy. Basing spending on RMDs is a percentage-of-portfolio strategy (though itself a specific subcategory, because the percentage increases each year with age). But here the “modification” is that rather than basing spending on a percentage of the portfolio balance on the final day of the previous year, it’s based on the average portfolio balance of the final days of the last three years, with the result being that spending is less volatile from one year to another.