Amortization based withdrawal

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Amortization based withdrawal (ABW) uses amortization techniques to calculate portfolio withdrawals during retirement. Examples of withdrawals that use amortization include Variable Percentage Withdrawal (VPW) and the Required Minimum Distribution (RMD) rules for traditional retirement accounts.


Understanding amortization

Amortization is the process of converting the value of a lump sum into a series of payments over time. Most people encounter it when they take out a mortgage or car loan. Amortization is used to calculate the monthly payment required to pay back the loan. The value of the monthly payments has to be made equal to the value of the initial loan.

If the interest rate is zero, amortization is just simple division: If $100,000 has to be paid back over 10 years, then the payment is $100,000 ÷ 10 = $10,000 per year.

But if the interest rate is positive, as is usually the case, then the payment in the above example would have to be more than $10,000 per year. That's because $10,000 in the future is worth less than $10,000 today. This is referred to as the time value of money. If the interest is 5% per year, then $10,000 today is worth:

  • one year from now
  • two years from now

and so on. We will have to adjust for the differences in value. The amortization formula makes the necessary adjustments and tells us that if the interest rate is 5% per year, then the payments will have to be $12,950 per year for the next ten years for the total value of the payments to be equal in value to the $100,000 that was borrowed today.

Amortization based withdrawal

To calculate portfolio withdrawals, enter the following inputs in the ABW calculator (below):

  • current portfolio value
  • number of years over which withdrawals are to be spread out
  • expected return of the portfolio.


A 65 year old retiree with a $1 million portfolio expected to earn 3% per year and seeking to spread out withdrawals over 36 years (ages 65 to 100), would enter . The amortization calculator says that this retiree can withdraw $44,470 per year. This means that if the portfolio actual rate of return remains constant at 3% per year and the retiree withdraws $44,470 every year, then the portfolio will be fully depleted after 36 years.

Real vs nominal rate of return

If a real (inflation adjusted) rate of return is used, the withdrawal strategy becomes automatically adjusted for inflation. In the above example, if the real rate of return is 3%, the retiree will be able to take out $44,470 (inflation adjusted) each year. If instead, the retiree enters a nominal interest rate of 5%, the calculator says that they can take out $60,434 per year. But that's in nominal dollars, so real consumption will decline each year by the inflation rate. In practice, it is strongly recommended to use a real rate of return.

Update and adapt

Withdrawals are recalculated each year with updated information about portfolio value, expected rate of return, and number of years left. This allows withdrawals to continually adapt to new information and mitigates the impact of past incorrect assumptions. Amortization spreads the course correction required across all remaining years, thereby minimizing the impact on any one year.


Consider what happens in our earlier example if, instead of gaining 3% as expected, the portfolio actually loses 10%. The shortfall relative to expectations is . Our retiree had expected to start age 66 with $984,196 in the portfolio. Instead, the portfolio contains only $859,977, which is 12.6% less. Consider what happens in the following two scenarios:

Scenario 1: Expected return stays the same

Suppose that the retiree believes that this market drop has not impacted future expected returns, which in the retiree's opinion, remains at 3%. The retiree enters the new reduced portfolio value, , number of years remaining , and expected real return . The withdrawal is now reduced to $38,857 per year. That is a 12.6% reduction relative to the previously planned withdrawal of $44,470. So the 12.6% portfolio loss is being matched by a 12.6% spending cut across all remaining years.

Scenario 2: Expected return increases

If the market drop was due to a pure valuation change and the underlying earnings of the portfolio are not impacted, then the retiree might expect a higher rate of return going forward.

If expected return is based on an earnings yield model (e.g. 1/CAPE) for stocks and yield to maturity for bonds, a 12.6% reduction in valuation will result in a higher expected real return of . With the higher expected return, the withdrawal becomes $41,181. That is a reduction of only 7.4% relative to the original plan of $44,470. A 12.6% reduction in the portfolio led to only a 7.4% reduction in income, because the higher expected return partially offset the loss in portfolio value.

So to the extent that market volatility is caused by valuation changes and gets incorporated into expected returns, withdrawals from the portfolio will be less volatile than the portfolio itself.

Adding a terminal balance

Instead of fully depleting the portfolio, the amortization can be modified to leave behind a terminal balance. This could be used to fund end of life care or a bequest, or it could simply serve as a general financial cushion.

In the ABW calculator, enter:

  • terminal balance


The 65 year old retiree in the earlier example wants to have $200,000 left at the end for a bequest. Enter in the calculator to get a withdrawal of $41,401 per year. If the actual rate of return matches expectations, then after withdrawing $41,401 for 36 years (ages 65 to 100), the retiree will have $200,000 remaining in the portfolio at the end of age 100.

Rising or falling withdrawal schedules

Instead of aiming at a constant withdrawal schedule, some retirees may prefer to aim at a rising or falling withdrawal schedule. Retirees worried about incurring unexpected expenses or generally running out of money in later years may want to use a rising withdrawal schedule - take less early so they can have more later. Those wanting to fund an active early retirement may want to use a declining withdrawal schedule - take more early but have less later. (Note the similarity with savings. This can be viewed as a decision about how much to save in the early retirement years in order to fund late retirement consumption.)

In the ABW calculator, enter:

  • rate of growth of the withdrawal schedule

generates a rising withdrawal schedule, generates a declining withdrawal schedule, and generates a constant withdrawal schedule.


If the 65 year old retiree in the earlier example wants withdrawals to grow at 1% per year, set to get a withdrawal of $38,349. Withdrawals are scheduled to grow 1% per year, rising to $54,325 at age 100.

If instead the retiree wishes to spend more in early retirement and wants withdrawals to fall by 1% per year, set to get a withdrawal of $51,118. Withdrawals are scheduled to fall 1% per year, declining to $35,959 at age 100.

Asset allocation

Fixed asset allocation

The amortization formula assumes an expected rate of return on the portfolio which stays consistent over the retirement period. This is easier to justify if the retiree plans to maintain a fixed asset allocation (AA). If instead the retiree is planning to change the AA over time (e.g. glide down from 60/40 to 30/70 over the course of the retirement), then the expected return will display more variations over time, skewing the amortization computation. The calculator provided here is not designed for such case. Entering the average expected return in the calculator may provide a rough estimate, but due to the potential for significant errors, more precise modeling is recommended.

Fixed asset allocation with sub-portfolios

The portfolio can be divided into multiple sub-portfolios and a different fixed allocation applied to each sub-portfolio.

Suppose the retiree is more risk averse over certain categories of consumption (e.g. food and housing), and less risk averse over other categories (e.g. vacations). The portfolio can be subdivided into a safer portfolio to fund food and housing and a riskier portfolio to fund vacations. The safe portfolio would get a safe fixed AA like 30/70, and the riskier portfolio would get a riskier fixed AA like 80/20. Multiple sub-portfolios could be created to fund different consumption goals, each with a different AA that matches the risk-reward considerations for that goal. Withdrawals would be calculated separately for each sub-portfolio.

An example of a strategy that uses sub-portfolios is the Liability Matched Portfolio (LMP) strategy. The portfolio is divided into a "liability matched portfolio" and a "risk portfolio". The liability matched portfolio has an AA of 0/100 and is used to fund non-negotiable consumption. The risk portfolio is given a riskier AA and is used to fund discretionary "nice to have" consumption.

Estimating the expected return

The ABW calculation requires the user to input the expected rate of return of the portfolio. ABW does not recommend a specific model for this purpose. The user is free to use whatever model of expected return they prefer. Examples of models that can be used include:

Models based on earnings yields (e.g. 1/CAPE)

<Enter info>

Models based on historical returns

<Enter info>

Extra income and expenses

Besides their savings portfolio, retirees may have other sources of present or future income such as social security, pensions, annuities, rental income, part-time wages and lump sum payouts ("extra income"). Retirees may also plan for exceptional expenses such as college tuition, a lingering home mortgage or long-term care expenses that may require funds beyond what is provided by regular budgeting ("extra expenses"). Such future extra income and expenses can be amortized by computing the present value of such future sums (see Wiki article on calculating present value by discounting future cash flows: Comparing Investments) and converting in an additional series of payments, beyond the regular payment derived from the savings portfolio's balance. It is strongly recommended to perform such computations in real (inflation-adjusted) terms. Funding such additional payments in the short-term can be achieved in different ways, e.g. structuring financial assets according to the retiree's personal risks/rewards goals. ABW is neutral and does not take a position on how best to do it. Below are some of the strategies which can be used:

Separate sub-portfolio approach

The retiree can choose to keep funds for some or all of the extra income and expenses outside the regular amortization process. They can allocate extra income and budget for extra expenses, separate from the ABW calculation. This is effectively a partitioned portfolio approach where extra income and expenses are being handled in a separate safe sub-portfolio.

A retiree formally pursuing the separate portfolio approach described earlier may find it convenient to use conservative estimates of social security and pensions to fund the safe sub-portfolios. For more complex cases, sizing the sub-portfolio can be achieved by a present value computation of future extra income and expenses (e.g. when using a bonds ladder, use the bonds interest rate to discount future income/expenses). The income streams are typically duration matched. Gaps remaining can be filled with duration matched bonds. Depending on the asset allocation, there may be little to no rebalancing needed in safe sub-portfolios.

Savings portfolio (fixed asset allocation) approach

The retiree can choose to fund the additional payments through additional withdrawals from the savings portfolio, using a fixed asset allocation. The discounting and amortization rate should then be the savings portfolio's expected rate of return, reflecting the savings portfolio's risks/rewards profile. Care should be exercised about the additional burden on one's savings portfolio and possible consequences of market crises before steady future income (e.g. SS/Pensions) materializes.

Calculate the extra net income (extra income minus extra expenses) for each year of the planned withdrawal period, using conservative estimates of extra income and exceptional expenses. Calculate its aggregate present value using the portfolio's expected rate of return. Calculate amortized additional withdrawals based on such value, in the same manner as the savings portfolio balance is amortized. Such computation is independent from the portfolio's rebalancing procedure and doesn't change the expected return computation. More information on this approach is available on this blog article, which comes with a companion spreadsheet.

Total portfolio approach

The retiree can choose to fund the additional payments through... <<Ben to elaborate, including a brief explanation of "total portfolio" concept>>.

Calculate the extra net income (extra income minus extra expenses) for each year of the planned withdrawal period, using conservative estimates of extra income and exceptional expenses. Calculate its aggregate present value using bond interest rates. Add this value to the regular portfolio's balance for all calculations, counting it as a bond. Include it when calculating withdrawals. Include it when calculating the asset allocation of the total portfolio (for rebalancing) and the expected return of the total portfolio (to enter into the amortized payment computation). More information on this approach is available here: <insert link>

ABW calculator

Basic calculator

The Excel spreadsheet to calculate withdrawals in on Google Drive: ABW Calculator

User:Ben Mathew/Formulas for Amortization Based Withdrawal (ABW) describes the formulas used in the calculator.

Advanced calculators

These calculators expand the basic functionality to include other considerations.

An Excel spreadsheet that incorporates extra income and expenses is available on Google Drive: ABW Calculator with Extra Income and Expenses.

Another calculator performing similar amortization functions and providing some backtesting capabilities is formatted as a Google sheet and is available here (please make a copy): Amortized Spending Budget - Fixed Asset Allocation.


On-going discussion and support is in Bogleheads® forum topic: Amortization Based Withdrawal (ABW).

See also