For example, one rule of thumb is to spend only portfolio interest and dividends. But this strategy could lead to retirees to put more assets into risky bank stocks.
Another rule of thumb is to withdraw 4% of the initial balance and adjust the dollar amount annually by inflation rate. But this strategy doesn't respond to realized investment returns, for example, withdrawing fixed amount in a sinking market will soon run into trouble.
A 2010 Vanguard Group paper points to a third strategy - a combination of an immediate inflation-adjusted annuity with an RMD approach to retirement asset withdraw yields stable cash flows that grew at a faster rate than those of other rules of thumb.
What is RMD-based Withdrawal Strategy?
It calculates the annual withdrawal as a percentage of the remaining portfolio (therefore it is responsive to investment returns). The withdrawal percentage increases with age, allowing retirees to use more of their portfolio as their life expectancy decreases.
What is the drawback?
This strategy may result in withdrawal rates too low, especially in early retirement time, causing retirees to leave behind money that they may have preferred to spend.