The ideal method for withdrawing retirement funds largely hinges on your personal priorities.
This insight stems from our latest annual survey on safe withdrawal rates. Every withdrawal strategy brings its own set of trade-offs—whether it’s straightforward or intricate, involving high initial withdrawal rates or fluctuating cash flows, focusing on maximizing lifetime spending, or giving some for family inheritance, and so on.
My colleagues and I—Tao Guo, Jason Kephart, Christine Benz, and myself—evaluated nine different withdrawal strategies. Interestingly, several allowed for higher withdrawal rates than the well-known “4% rule” established by Bill Bengen.
In the upcoming weeks, we’ll delve into which method would be best suited for you, based on what matters to you most personally. (For context, last week’s article examined strategies aimed at enhancing your legacy.)
The best strategy to maximize lifetime spending
For certain retirees, maximizing their retirement fund means spending as much as they can over their lifetime. After all, you can’t take it with you. And after years of hard work and saving, retirement can indeed be the prime time to enjoy what you’ve earned.
We explored these strategies by simulating 1,000 hypothetical return patterns over a span of 30 years, making assumptions about future returns and volatility. Each strategy was then evaluated to determine a safe starting withdrawal rate that could support three decades of spending with a 90% success rate.
Starting with a portfolio of $1 million, we totaled annual withdrawals across these tests, adjusting for any changes based on the chosen strategy while factoring in inflation. After compiling the results, we calculated the median lifetime withdrawal amount.
From our findings, three strategies notably stood out regarding lifetime spending over three decades.
Probability-Based Guardrails: Median Lifetime Spending is $1.55 Million
This method, while requiring ongoing evaluation and adjustments, emerged as the top choice for maximizing lifetime spending based on our analysis. By continually reassessing the success rate of a spending plan, retirees can often spend more compared to a more rigid approach.
In testing this strategy, we recalculated the probability of success after every year. If it fell below 75%, the planned spending was reduced by 10%. Conversely, if conditions improved and the success rate increased to 95%, we allowed for a 10% increase in spending. To mitigate large drops in withdrawal amounts, we set a baseline to ensure annual withdrawals never dipped below 90% of the initial amount.
For instance, Alice, in her first retirement year, withdrew 5.1% of her $1 million portfolio—about $51,000. After some favorable market trends and moderate inflation, her success probability soared to 130%. Hence, we raised her annual withdrawal by 10%, adjusted for inflation.
Required Minimum Distributions: $1.5 Million in Median Lifetime Expenses
This framework relates to the required minimum distributions (RMD) from tax-deferred accounts like IRAs. Simply put, it divides the portfolio’s value by its expected life span. We assumed a retirement period of 30 years, starting from age 67.
This method is considered “safe” as the withdrawal amount is a fixed percentage of the portfolio. Additionally, because the RMD accounts for variations—like life expectancy and portfolio value—it permits increased overall spending throughout retirement.
For example, Claire took out 4.7% of her $1 million portfolio (around $47,000) in her first year. By year-end, her portfolio value adjusted to $991,120. Using IRS life expectancy tables, she calculated her required minimum distribution based on her current age.
Guardrails: Median Lifetime Spending is $1.36 Million
The guardrail method, articulated first by Jonathan Guyton and William Klinger, starts with an initial withdrawal rate that adjusts annually based on the portfolio’s performance and prior withdrawal rates.
This approach, like the earlier two, allows retirees to enhance lifetime spending by modifying withdrawals to curb overspending during market downturns while permitting higher spending in prosperous times. By doing so, it aims to maintain adequate funding in bullish markets while ensuring corrections post-losses.
For instance, during his first retirement year, Bob withdrew 5.2% of his $1 million portfolio—around $52,000. If by the second year, his portfolio grows to $1.4 million, we adjust his withdrawal amount accordingly and retain some flexibility.
Other Benefits of These Three Methods
Beyond maximizing lifetime spending, these flexible methods allow retirees to withdraw more than the conventional starting safe withdrawal rate of 3.9% of their assets.
We found that retirees using the guardrail method could start with 5.2% of their portfolio, while the probability-based variant allowed for 5.1%, and the RMD method offered a starting rate of 4.7%. For a typical $1 million portfolio, these higher rates could mean added first-year spending—between $8,000 to $13,000—compared to the basic strategy.
Drawbacks of Spending Methods Focused on Maximizing Lifetime Spending
However, pursuing maximum lifetime spending isn’t without its trade-offs. Drawing down assets more aggressively may leave retirees with less after 30 years. For instance, the RMD method typically results in a final portfolio value around $120,000, while the probability-based approach sees a balance of about $230,000. The guardrail strategy, while yielding a higher total, may not suit those wanting to leave larger legacies for their families.
Each method also showed lower averages in spending alongside the remaining portfolio value after 30 years, which means they aren’t optimal for maximizing the overall potential of retirement savings.
These strategies can lead to fluctuations in spending over the years, which can be hard for those who prefer a steady income to meet their expenses. Particularly, the RMD method can create significant ups and downs in withdrawals, leading to steep reductions in spending during downturns.
