I've been following the endowment rule for a while now. I believe it originated at Yale. The basic recommendation is to average the previous 12 quarters of your portfolio value and multiply by 5% to arrive at your annual spend rate. Being a little more conservative, I use 4% as the guide. It does result in a smoother spending rate. For instance in the last four years, my "recommended" annual spend rate only declined once and by less that $100.
Another observation: My portfolio reached its all time high in the 4th quarter of 2021 and declined 19.5% by quarter 3 of 2022 and yet the recommended spend rate actually increased during that period. It seems to avoid major spending shocks either to the up or down side by virtue of the smoothing formula. Hope that helps clarify a little.
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I've been following the endowment rule for a while now. I believe it originated at Yale. The basic recommendation is to average the previous 12 quarters of your portfolio value and multiply by 5% to arrive at your annual spend rate. Being a little more conservative, I use 4% as the guide. It does result in a smoother spending rate. For instance in the last four years, my "recommended" annual spend rate only declined once and by less that $100. Another observation: My portfolio reached its all time high in the 4th quarter of 2021 and declined 19.5% by quarter 3 of 2022 and yet the recommended spend rate actually increased during that period. It seems to avoid major spending shocks either to the up or down side by virtue of the smoothing formula. Hope that helps clarify a little.
Post: Spending It
Link to comment from January 11, 2025