For many people, transitioning into retirement requires a different mindset than the one you had during your working years. Instead of focusing on saving and growing your wealth, the focus shifts to drawing down those savings to support your lifestyle. That can be a difficult transition to make, especially for people who’ve spent most of their working years laser-focused on building their accounts and watching the numbers go up.
One of the most important components of retirement planning is your withdrawal rate. This determines how much of your savings you will spend each year, and ultimately what kind of life you will live in retirement. It’s a particularly tricky balance: no one wants to overspend and risk running out of money, but at the same time, dying with a pile of untouched savings doesn’t exactly feel like winning either.
There are a lot of opinions out there on how best to approach retirement withdrawals. Academics, financial professionals, and even YouTube “experts” have all weighed in. In this piece, I broke down some of the most prominent strategies and their pros and cons. It’s not an exhaustive list, and there’s no one-size-fits-all solution—but these are the approaches that I most often see discussed in the real world.
This strategy was popularized in the 1990s based on research by Bill Bengen¹. Bengen found that an investor’s funds would last for 30 years if they withdrew 4% of their total nest egg per year. This was true even during the worst historical time to retire (the bear market and high inflation of the late 1960s and through the 1970s).
Pros:
Cons
Bottom Line: this is a well-known strategy, but a bit outdated in my opinion. Even the author has suggested changes. This strategy is conservative, which feels “safe,” but will most likely lead to investors not fully enjoying their retirement savings.
This strategy splits a retiree’s funds into three “buckets”²:
The idea of the bucket strategy is to draw from the short-term bucket during stock market downturns so that your long-term investments have time to recover.
Pros:
Cons:
Bottom Line: this is a useful strategy for deciding on an investment allocation and managing anxiety during market downturns. It is, however, not a “set it and forget it” strategy. This strategy requires a lot of careful supervision and monitoring.
I first heard about this strategy from retirement researcher Wade Pfau in his Retirement Planning Guidebook³. This strategy uses “fixed” income sources (Social Security, pensions, and annuities) to create a “floor” of guaranteed income that covers necessities like housing, food, and insurance. This allows retirees to use investments for discretionary spending like vacations or gifts.
Pros:
Cons:
Bottom Line: I think this is a viable strategy, especially for risk-averse retirees. It can sometimes create the confidence to spend more freely. However, locking up funds in guaranteed income products can limit upside and flexibility later on.
This strategy was developed by researchers Guyton and Klinger⁴ in 2004. This strategy sets an annual withdrawal amount (typically 5–6% of portfolio total) with an automatic adjustment for inflation. The unique aspect of this strategy is it has a built-in adjustment depending on how markets perform. When markets go up, income is increased by a predetermined amount. The same is true for when markets go down.
Pros:
Cons:
Bottom Line: this strategy allows for higher withdrawals as a percentage of portfolio balance than, say, the 4% rule, and is the most likely in my opinion to allow a retiree to spend most of their funds. It is, however, important to remember that this strategy can require a great deal of work and the potential for income cuts in retirement.
This is perhaps the most conservative strategy and involves living on only dividends/interest from investments, without touching principal. This strategy was especially popular in the 1960s and 1970s when the average S&P 500 dividend yield hovered around 3.5–4.5%. Today, with yields closer to 1.5%, this is much harder to sustain⁵.
Pros:
Cons:
Bottom Line: While technically feasible, this strategy often causes retirees to greatly underspend and not fully enjoy the wealth they’ve built. It can work—but may leave a lot of lifestyle potential on the table.
As you can see, there’s no withdrawal strategy that’s perfect for everyone. What works best can vary from person to person and even shift over time as your life and needs change. It’s also possible to combine some of these strategies. If we’ve talked before, you probably know I tend to favor a mix of “buckets” and “guardrails.”
Ultimately, when it comes to retirement, the most important thing is having a strategy that’s tailored to you. The best strategy for you will depend on your goals, your lifestyle, and your comfort with risk.
If you have questions about any of these strategies, or if you want to take a closer look at your plans for income in retirement, feel free to reach out. I’m always happy to talk through what might work best for you.
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Citations
1. William Bengen, “Determining Withdrawal Rates Using Historical Data,” Journal of Financial Planning, 1994.
Wikipedia summary
2. Christine Benz, “The Bucket Approach to Retirement Portfolio Planning,” Morningstar, 2023.
Morningstar overview
3. Wade Pfau, Retirement Planning Guidebook: Navigating the Important Decisions for Retirement Success, 2020.
Amazon link
4. Jonathan Guyton & William Klinger, “Decision Rules and Maximum Initial Withdrawal Rates,” Journal of Financial Planning, 2004.
FPA article
5. Multpl.com, “S&P 500 Dividend Yield,” https://www.multpl.com/s-p-500-dividend-yield