The Spending Rule: How much can you withdraw from your assets each year?

You have a net worth of €5 million. You are 55 years old and want to retire at 60. The question: How much can you spend annually without using up your capital? €200K? €250K? €300K? The answer is based on the “Spending Rule” – a scientific formula that Yale uses. This article will show you the math behind it and how to determine the right rate for your personal case.

The 4% Rule and its limits

The “4% Rule” is the classic formula:You can withdraw 4% of your portfolio in the first year, then increase withdrawals based on inflation.

At €5 million that means: €200K in year 1, €204K in year 2 (at 2% inflation), €208K in year 3, etc.

This rule has worked well for the last 50 years - with a 94% success rate ("success" means: the money lasts 30+ years). But the 4% rule has weaknesses:

• It ignores the age of the investor (a 35-year-old with a 50-year horizon needs a different ratio than a 75-year-old)
• It ignores the current market valuation (after a bull market 4% might be too aggressive)
• It ignores the actual portfolio structure (If you have 100% bonds, 4% is unrealistic)

Yale's 5.25% Smoothing Rule

Yale uses a “Spending Rule with Smoothing”:

Withdrawal = Prior Year Withdrawal * (1 + Inflation) * 0.8 + Current Portfolio Value * 5% * 0.2

This means: 80% of the withdrawal is based on inertia (prior year + inflation), 20% on the current portfolio size.

The advantage: This rule reduces the volatility of withdrawals. If your portfolio loses 30% in a year, the withdrawal doesn't suddenly drop by 30%. It only drops ~6% because the 80% component remains stable.

For you: If you have €5 million and took out {{200k}}, your withdrawal next year will be approximately {{200k}} * 1.02 (inflation) = {{204k}}, even if your portfolio drops to {{4.5m}}.

The personal spending rule: 3% to 6%

The correct withdrawal rate depends on three factors:

1. Period (The longer, the lower)
- 10 year horizon: 6-8% is acceptable
- 30 year horizon: 3-4% is safer
- 50+ year horizon: 2-3% is the norm (foundations)

2. Portfolio structure (the more diversified, the higher)
- 100% bonds: 3-4% max.
- 60/40 portfolio: 4-5% is safe
- Yale-like (50% Alternatives): 5-6% is realistic

3. Flexible vs. Fixed (The more flexible you are, the higher)
- “I need exactly €250K per year, no matter what”: 4% max.
- »I can reduce to €200K if necessary«: 5-6% possible

Your personal spending calculation

Step 1: Define your time horizon "I'm 55, I want to live until 95 = 40-year horizon"

Step 2: Evaluate your portfolio structure »My portfolio: 50% equities, 30% real estate, 20% bonds = moderate risk«

Step 3: Determine your flexibility »I need at least €250K per year, but can go down to €200K if markets crash.«

Recommendation: 4-5% is safe for you
At €5 million: €200K-€250K per year

Step 4: Use the smoothing rule - Year 1: €250K - Year 2 (when portfolio drops to €4.8M): €250K * 1.02 * 0.8 + €4.8M * 5% * 0.2 = €204K + €48K = €252K This is more stable and less “shocking” than a sudden drop to €192K.