In a 2013 article, a Vanguard research team headed by Colleen Jaconetti developed an alternative form of the floor-and-ceiling spending rule that relies on percentages rather than hard dollar amounts.
With their framework, the ceiling refers to a maximum percentage increase in spending each year, while the floor refers to a maximum percentage drop in spending for each year. The baseline case they describe is a 5% ceiling and a 2.5% floor, illustrated in Exhibit 1.
To determine spending, they say to first apply a fixed-percentage spending rule to the remaining account balance. For the baseline, if the spending amount would be more than 5% greater than that of the previous year, then the new spending amount is capped at 5% growth.
To determine spending, they say to first apply a fixed-percentage spending rule to the remaining account balance. For the baseline, if the spending amount would be more than 5% greater than that of the previous year, then the new spending amount is capped at 5% growth.
Meanwhile, if the spending amount would drop by more than 2.5%, then spending for the year is limited to a 2.5% decrease. Each year the rule is applied again to the previous year’s spending level.
The narrower the range between the floor and ceiling, the more this spending rule acts as a rule that increases spending at a fixed rate. As the range increases, the rule behaves more like a fixed percentage rule, because you become less likely to reach the binding constraints on either end.
Despite the lack of a hard dollar floor, this method is also susceptible to portfolio depletion. Spending may not always drop quickly enough to preserve the portfolio.
Exhibit 1 Time Path of Real Spending and Wealth
Vanguard’s Percentage Floor-and-Ceiling Rule
For 4% Initial Spending Rate, 50/50 Asset Allocation, Rolling 30-Year Retirements
Using SBBI Data, 1926-2015, S&P 500 and Intermediate-Term Government Bonds
Vanguard’s Percentage Floor-and-Ceiling Approach
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