Retiring into a downturn when you depend on your savings is challenging. But there are ways you can adjust to make the transition more manageable, from lowering overheads to finding potential new sources of income.

The possibilities are many, from downsizing or tapping into the equity of your home to renting out spare rooms and parking spaces, selling off clutter and rooting out some temporary or freelance work. 

And if you haven’t retired yet, you may be able to stay in work for a little longer, so you can continue paying into your pension.

However, for many people, these options may seem unworkable or unpalatable. You may not want to leave your family home. You may also be unwilling or unable to return to employment.

There is another option, though – one that recognises that the value of your investments may fall as well as rise and that makes the most of flexible drawdown access. We call it ‘dynamic spending’ and our research shows that it can significantly extend the life of your pension pot.

Traditional drawdown strategies

More traditional drawdown strategies include the ‘pound-plus-inflation’ rule. This involves setting a yearly budget in pounds and then increasing it each year in line with inflation. Often the initial amount is based on a pre-determined percentage of the overall starting pot – most commonly 4%, although potentially less, depending on the age you retire at and the length of time you want the money to last.

It’s an approach that can give you a high degree of certainty about the money you have to spend, year in, year out – at least to begin with. Because further ahead there’s still the risk of early depletion in the event of a run of poor market returns – or high inflation, as we face today.

An alternative approach that ensures your pot never runs out is to take a fixed percentage of your pension each year. If your investments perform well one year, you might even get more of an uplift in your income.

However, your annual spending power will also fluctuate depending on how the market performs and you could quickly end up with insufficient funds to cover your spending requirements as your pot diminishes, so in some sense it is impractical.

What sets dynamic spending apart

A hybrid approach, though, can capture the best of both worlds. This is where Vanguard’s ‘dynamic spending’ approach comes in, by offering greater stability than the fixed-percentage approach plus more sustainable spending power than the pound-plus-inflation rule.

It’s a more flexible approach that works well with pensions in flexi-access drawdown.

The way ‘dynamic spending’ works is that it makes modest adjustments to withdrawals in response to how markets have performed in any one year, subject to a ‘ceiling’ when markets fare well and a ‘floor’ when they don’t. This helps to protect the portfolio’s ability to withstand market swings.

It’s an elegant and effective alternative and it can guide you towards a more sustainable rate of withdrawal.

Worked example

To illustrate that, here’s a worked example. Imagine that the performance ceiling is set at 5% and the floor is set at -2.5%. Imagine also that you are targeting an initial annual income of £30,000 – or 4% of a £750,000 portfolio.

If we assumed that inflation at the end of the year 1 was 5%, then the floor and ceiling within which your income could fluctuate in year 2 would be £30,712.5 (£30,000 + £1,500 - £787.50) and £33,075 (£30,000 + £1,500 + £1,575).

But now we know the parameters, what would your income be in practice in year 2 if the value of your remaining investments fell by 10% or rose by 10% over year 1?

In the first case, where your investments did badly, you would draw an income of £30,712.5 (the floor) – that is, more than you would have otherwise got if you’d factored in the full market performance.

In the second case, where your investments did well, you would get an amount that fell within your parameters – that is, £31,680, so less than you might have otherwise got (The total of your remaining £720,000 portfolio + 10% multiplied by the 4% rate of withdrawal).

And so on.

The table below provides a high-level summary of the three approaches.

Comparison of spending strategies

Initial annual withdrawal e.g. £40,000 e.g. £40,000/4% portfolio e.g. 4% of portfolio
Annual rise Inflation rate Inflation +/- market return subject to cap/floor None
Market sensitivity  Unaffected Somewhat responsive Very responsive
Spending stability in short-term Stable Fluctuates within stated limits  Unstable
Spending flexibility Inflexible More flexible  Highly flexible
Portfolio durability Unpredictable More stable  Infinite

For illustrative purposes.  Positive outcome from spending strategy  Negative outcome from spending strategy.

Source: Vanguard.

Testing the theory

The goal of the Vanguard’s dynamic spending rule is to keep annual real (or inflation-adjusted) spending relatively stable while also preserving the longevity of your portfolio, giving you greater peace of mind and, hopefully, a more comfortable retirement.

That’s the theory. To test it, our researchers1 modelled the likely performance of a hypothetical portfolio of £800,000 over 30 years using Vanguard’s in-house market-forecasting tool2 and different drawdown methods. In this, they assumed the retiree was invested all the time in a diversified global portfolio split 60:40 between shares and bonds.

Our experts then looked at how long this portfolio would probably last under three different scenarios for the amount of income withdrawn: £30,000, £40,000 and £50,000. In the case of dynamic spending, they also set the ceiling for annual increases in the amount withdrawn at 5% and the floor for annual downward adjustments at -2.5%.

What they found in each case is that a retiree who followed our dynamic-spending method of withdrawal had a much greater chance of not running out of money compared with the pound plus inflation rule. The chart below shows the percentage differences in probability from the study.

Will your portfolio last at least 30 years?

Source: Vanguard. Notes: Assuming: starting portfolio of £800,000 and starting withdrawal of £30,000 to £50,000. Time horizon: 30 years after March 2020. Ceiling: 5%. Floor: -2.5%. Asset allocation: domestic shares: 10%, international shares: 40%, domestic bonds: 17.5%, international bonds: 32.5%

Nobody can predict the future. But as investors it generally pays to expect the unexpected and to focus on what you can control, like your costs and the degree of diversification in your portfolio.

This is especially true when we are retired and most dependent on our investments for our income. It’s why putting our spending on a sustainable footing in our later years can be just as important as all that time and effort we put into building up our retirement savings in the first place.


1 For more, see ‘Sustainable spending rates in turbulent markets’, Ankul Daga, CFA, David Pakula, CFA and Jacob Bupp, Vanguard Research Note, January 2021.

2 IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes (in GBP) from the VCMM are derived from 10,000 simulations for each modeled asset class.

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model® regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.

The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.

The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include US and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, US money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.

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