The first method to be tested is the original constant inflation-adjusted withdrawal strategy introduced in William Bengen’s 1994 article, “Determining Withdrawal Rates Using Historical Data.” This will serve as a baseline for subsequent comparison with other strategies. Bengen’s rule says to adjust spending annually for inflation and maintain constant inflation-adjusted spending until the portfolio depletes.
Annual spending increases by the previous year’s inflation rate and does not otherwise adjust for market returns or the present size of the underlying investment portfolio. The withdrawal rate is defined only in terms of the first year of the plan, and subsequent spending rates are no longer tracked as an input to guide spending. Spending continues to adjust for inflation, regardless of portfolio size, unless and until the underlying portfolio is fully depleted.
We have already analyzed how this method performs in historical data. A 4% initial spending rate survived all of the rolling historical periods when using a 50/50 portfolio. Exhibit 1 shows how this plays out, with sixty-one lines (on top of one another, in this case) with real spending of $4, reflecting the sixty-one rolling historical thirty-year periods in the dataset for which the rule could provide a consistent real income.
We have already analyzed how this method performs in historical data. A 4% initial spending rate survived all of the rolling historical periods when using a 50/50 portfolio. Exhibit 1 shows how this plays out, with sixty-one lines (on top of one another, in this case) with real spending of $4, reflecting the sixty-one rolling historical thirty-year periods in the dataset for which the rule could provide a consistent real income.
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