Summary
This rule applies a fixed percentage withdrawal with hard limits, allowing spending to fluctuate within these boundaries.
The rule seeks to maintain the portfolio's value, particularly during adverse financial scenarios.
Description
The Floor and Ceiling Rule was introduced by financial adviser William Bengen. It is a dynamic spending strategy that allows for greater spending when markets are up, and necessitates spending reductions when they are down. This strategy sets hard limits in both directions - ceilings and floors - enabling spending to fluctuate considerably but only within these prescribed boundaries in real terms. This strategy makes a significant contribution to preserving wealth, particularly during worst-case scenarios, by enforcing a willingness to reduce spending by up to X% from the initial level when necessary.
Example
Let's consider a retiree starting with a portfolio worth £1,000,000, withdrawing £40,000 initially (4% withdrawal rate), and setting an annual lower limit (floor) of -30% and an upper limit (ceiling) of 30% for withdrawal adjustments.
This means the maximum withdrawal (ceiling) in real terms is £52,000 per year and the minimum (floor) is £28,000. Using this withdrawal rule, an annual review determines the withdrawal to be 4% of the current portfolio balance unless this amount exceeds £52,000 or is less than £28,000 in real terms. In the first case, the amount is capped at the ceiling value of £52,000, and in the second case, it's collared at the floor value of £28,000.