Do you expect to spend the same amount in each and every year in retirement?

Of course not. Yet many financial plans nevertheless assume that you will. The famous 4% rule, for example, grew out of research about what steady withdrawal rate you could maintain throughout retirement and never run out of money—even if the markets perform as terribly as they have in the worst periods in U.S. history.

By definition, of course, avoiding the worst-case scenario ends up, in most cases, leaving a lot of money on the table. New research shows that there is a better way.

This new research, which began circulating in academic circles earlier this month, was conducted by Javier Estrada, a professor of finance at IESE Business School in Barcelona. His new study is entitled: “Managing to Target (II): Dynamic Adjustments for Retirement Strategies.”

In it, Estrada measured the success rates of various strategies that adjusted withdrawal rates depending on whether your portfolio in any given year is ahead or behind of what your retirement financial plan had assumed it should be. It will be ahead, needless to say, if your investments perform better than had been assumed by your financial plan—and behind if your investments have performed more poorly.

Estrada refers to strategies that adjusted withdrawal rates as “dynamic,” in contrast to the “static” strategy implicitly assumed by many financial planners.

To illustrate: Let’s say you retire with a $1 million portfolio, want to fund a 30-year retirement, and your investments grow at an annualized rate of 5% above inflation. Assuming you do not intend to leave a bequest, and assuming your portfolio’s investment return is 5% in each year along the way, you can withdraw the equivalent of $61,954 in today’s dollars in each and every one of those 30 years.

In fact, of course, that italicized assumption is unrealistic. Given the inevitable variability of yearly returns along the way—some good and…

This article was sourced from Market Watch.

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