Create a Dynamic Spending Strategy

Institutions, such as defined benefit plans and non-profit endowments, preserve their assets by setting a clear spending target that is flexible enough to respond to changing circumstances.

Small changes in spending can have a significant impact on wealth. Consider the effect of a 1% reduction in spending for a family with a $20 million portfolio. Assuming annual portfolio growth of 5.25%, on average, and a 4% annual spending rate, the portfolio's value will grow to $24.6 million after two decades. Reducing the spending rate to 3% over that same period would significantly increase the family's wealth, resulting in a $31.3 million portfolio.

Institutions, such as defined benefit plans and non-profit endowments, preserve their assets by setting a clear spending target that is flexible enough to respond to changing circumstances. We believe that this institutional approach can be useful for individuals and encourage our clients to adopt these proven practices in their own spending plans.

We will work with our clients to assess the sustainability of their current spending and the impact of potential changes. Our powerful proprietary forecasting tools provide a clear picture of how spending decisions can affect wealth over time. These tools also allow us to demonstrate what a client's future wealth might look like in different scenarios, facilitating informed decision-making.

These insights help us develop dynamic spending plans that address lifestyle needs, respond to market conditions and sustain wealth across multiple generations. In contrast to a static spending strategy in which the spending rate grows with inflation each year, the spending rate of a dynamic spending strategy is adjusted as circumstances change, protecting portfolio principal during market downturns.

This allows for greater compounding and makes the portfolio less reliant on market returns. We found that by reducing spending after a year in which a portfolio declined by more than 3% and increasing spending in any other year, we were able to add up to 0.8% in additional wealth, annualized, over the 1999 to 2018 time period.*

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  • *Advice alpha is defined as the value of comprehensive wealth management that leads to better wealth accumulation and greater success of achieving financial goals and objectives over the life cycle of a clients' relationship. For further information about how BNY Mellon adds value, including an explanation of how the value we add is quantified, please see "Leading With Advice Overview and Active Wealth Value Proposition Discussion" (December, 2019), a copy of which is available at https://www.bnymellonwealth.com/assets/documents/lwa/leading_with_advice_overview.pdf or from your BNY Mellon Wealth Manager or relationship contact.

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