Next year, you recalculate that first payment again, and spend that amount. In this way you self-correct for portfolio returns and interest rate fluctuations, and you avoid the possibility of running out of money. This was a side discussion in that article, which was primarily focused on the larger problem of investment strategy for investors with spending plans.
Larry Siegel and I thought that the idea warranted much more thorough discussion, as the industry starts to give more sophisticated attention to the issues facing individual investors. So in this current paper, published in the January-February 2015 issue of the Financial Analysts Journal, we dive in
more deeply. We refer to the concept as an "annually recalculated virtual annuity," or ARVA, and we develop it from (and as a quite high fidelity simplification of) the multi-period capital asset pricing models of Merton and others who recognized early on that one holds one's assets to fund future consumption. READ THE ARTICLE
We also show different ways that one can modify the horizon or the "shape" of the annuity, in order to provide for more spending earlier while still protecting spending later.
We highly recommend this article for all financial advisors and others that aid individual investors.
Since writing this paper, it has been suggested that we might have made the idea appear more relevant to a larger number of investors had we made the example investor a bit smaller: We used the nice round number of $1,000,000 as our investor's wealth at time of retirement; yet many many investors have much less. Perhaps we should have used $500,000 instead. However, the point of the paper is relevant whether you have $100,000 or $100,000,000; figure out how much you can spend from that sum, whatever it is, using an ARVA methodology.