Sustainable Retirement Income—Part Two: Variable Withdrawals


In the last article, we examined the first of two main types of systematic withdrawal strategies for sustainable retirement income: fixed withdrawals. In this article, we look at variable strategies.

A variable strategy may be a better fit for some retirees, as financial advisors often suggest you adjust your spending based on your portfolio’s value. It’s just common sense: When your portfolio increases, you can spend more, and when it falls, better to spend less.

We’ve seen that the “4% rule” has been questioned, and variable withdrawal strategies seek to correct some of its issues. You still spend from your portfolio but with less to spend during recessionary times. Variable and, therefore, unpredictable withdrawal amounts may cause cash-flow challenges but may better protect your assets over a long retirement.

Let’s look at the most common variable withdrawal strategies.

Performance-based withdraws

This strategy uses the previous year’s (or years’) stock market returns to guide withdrawals from a stock/bond portfolio. With a “last year performance strategy,” you withdraw totally from stocks in the current year if stocks returned more than bonds in the previous one. If bonds performed better, you would withdraw from them.

A variation of this strategy is to use a multi-year “moving average” performance metric. If the average stock returns for the last 3, 5, or 7 years beat the average return from bonds over the same period, you would withdraw entirely from stocks. Otherwise, you remove from bonds.

A popular way to implement this strategy is portfolio rebalancing. You rebalance your portfolio by using withdrawals to return your asset allocation to your original target.

To illustrate: If your portfolio is 55% stocks and 45% bonds, but your target is 50/50, and you are using a 3% withdrawal rate, you would sell 3% in stocks (or stock funds) to bring it to 52% stocks/47% bonds and take the 3% in cash proceeds as income. (You will also need to plan an account for taxes.)

Yet another variation is to withdraw a fixed percentage each year regardless of market performance. If the market is up, your withdrawal amount will be larger. If it’s down, the amount will be smaller. This is sometimes referred to as the ”endowment withdrawal approach.”

The most significant advantage of these methods is flexibility based on market performance. You can withdraw larger amounts during good times and smaller ones when the markets are down.

Another increasingly popular variable spending strategy makes annual adjustments tied to year-to-year stock market valuations. It assumes that lower returns and vice versa will follow higher market valuations. (The rationale is that you should withdraw less as you anticipate lower market returns.) The valuation indicator is Robert Shiller’s Cyclically Adjusted Price-to-Earnings Ratio or CAPE. You can calculate it by dividing the price of the S&P 500 by the average of the last ten years’ earnings, adjusted for inflation.

To implement the CAPE strategy, you withdraw from stocks if the CAPE exceeds its long-term median. If it’s lower, you withdraw from bonds. For example, stocks are over-valued if the CAPE is 30 and the median is 15.

This method is much debated, and tons have been written about it, but it may be too technical for most people to implement.

Capital preservation strategy

Some individuals favor an income-centric withdrawal strategy, where they purchase stocks or stock funds with high dividend yields and perhaps fixed income (bonds or bond funds, especially now that interest rates are higher) and rely solely on dividends and interest payments to fund their expenses.

The goal of this strategy is “capital preservation,” possibly with some growth, meaning they prefer not to have to sell assets for income. They anticipate that the stock prices will safeguard their initial investment, which may or may not be true for every planning period.

This is a variable withdrawal strategy because stock dividends and interest from fixed-income investments are variable. There’s no guarantee what they will be from year to year.

For that reason and others, sticking to this strategy can be challenging, especially during economic stress or low-interest rates. If you run short of income and don’t have a cash reserve to draw from, you may have to sell assets to raise cash, whether you like it or not.

I consider myself a “strategic growth and income” investor. Fidelity rates the risk of my 40/60 portfolio as “moderate with income.” My stock funds are diversified but with a “tilt” toward dividend income, and the fixed-income components (bond funds and short-term cash) generate more income than they used to.

Because I am not a strict total return investor, I don’t reinvest the dividends and interest and instead let them ‘flow’ into my cash bucket (I use a variation of the “bucket strategy), which I withdraw from to help fund our retirement expenses. However, as I discussed in my “bucket strategy” article, I’m not averse to selling assets for income if I need to.

Bucket withdrawal strategies

I have written extensively about bucket strategies, so I won’t get into much detail here. In its purest form, the bucket strategy is “liability matching,” which means setting aside a certain amount of money to match a time when you’ll need to use them for income.

Typically, this means structuring your portfolio with a well-diversified mix of stock and bond funds and perhaps some individual bonds in a bond ladder or a fund that contains bonds that mature around the same time. Then, those asset allocations are matched to anticipated spending needs, with the most conservative ones used for the near term (0 to 5 years) and risker assets for the later term (5 years and beyond).

In this way, the bucket strategy looks a lot like an asset allocation strategy, and it basically is. And it’s considered a variable strategy because the amount of money you designate for future spending may vary based on inflation and your personal spending plans.

Life expectancy-based withdrawals

Another variable withdrawal approach is to base the percentage on your life expectancy. The simplest way to do it is to use the IRS Required Minimum Distribution (RMD) actuarial tables. (You must use them if you have assets in a Traditional IRA when you reach age 73.)

But instead of that, you could estimate your life expectancy (say, 30 years) and withdraw 1/30 or 3.3% in the current year.

This seems reasonable as you would recalculate it each year based on your life expectancy at that age.

A drawback of this strategy is that it results in smaller withdrawals early in retirement and larger ones later. But this may be the opposite of how many retirees want to spend their money; they may spend more during their early years and less as they age.

Guardrail withdrawals

Some retirees will want (or need) to spend more early in retirement than what many of the withdrawal strategies we’ve discussed can provide. To allow for that and some flexibility in the future, you may want to use a hybrid approach that starts with a fixed percentage but then adjusts based on some “guardrails.”

One of the oldest (and simplest) is called the ”better safe withdrawal method,” or ”the 95% rule.”

You would start with a fixed withdrawal percentage each year, such as 4%, and then adjust it based on a withdrawal of the same amount, or 95% of the amount you withdrew in the previous year, whichever is larger.

For example, for a $500,000 portfolio, you’d withdraw $20,000 in year one. And let’s say that that’s a bad market year, and your portfolio is down 4% plus the 4% you withdrew, and its value at the start of year two is $460,000. In year two, you’d withdraw 4% of $460,000 ($18,400) or 95% of $20,000 ($19,000), whichever is larger, which would be $19,000. That’s $1,000 less than in year one.

You’d then repeat that process each year after that.

There are recently published, slightly more sophisticated guardrail methods. One of particular note was developed by a financial planner, Jonathan Guyton, and a business professor William Klinger.

Like other strategies, you first select an initial withdrawal rate: the higher rate, the more likely you will have to adjust your spending later on. So, instead of a 4% withdrawal rate, let’s say you select 6%.

Next, you decide under what conditions you will adjust it. These are your “guardrails.” For illustration, let’s say you set your guardrails at 20 percent above and below your withdrawal rate (you could use a higher or lower percentage if you wished). With a starting rate of 6%, your lower guardrail would be 4.8%, and your upper one would be 7.2%.

Suppose your withdrawal rate falls outside your guardrails (adjusted for inflation). In that case, you adjust your withdrawal amount by 10% (also a flexible number, but it’s the one Klinger used in his research as a reasonable percentage that retirees might be able to adjust their withdrawals by), which should put you back in the desired range.

Let’s see how this works using the same $500K portfolio as earlier.

In year one, draw 5% or $25,000. In year two, your portfolio lost 10% ($50,000), and Inflation in year one was 3%. Your inflation-adjusted withdrawal amount is $25,750 ($25,000 x 1.03). If we divide that by the year two starting value of your portfolio of $450,000 ($500,000 – $50,000), we get 5.7%. Since that’s higher than the 4.8% lower guardrail and lower than the 7.2% higher one, you don’t have to make any changes.

If the loss was much greater, let’s say 20 percent, the outcome would be different. Your portfolio value would be reduced to $400,000. The calculation then becomes ($400,000 / $500,000), or 8%, higher than our upper guardrail of 7.2%. That signals that you need to reduce your withdrawal amount in year two by 10 percent to $23,175 ($25,750 x 0.9), 5.8% of your $400,000 current portfolio value, and below the upper guardrail of 7.2%.

You would do this calculation and make any necessary adjustments annually. And, of course, you can withdraw a larger amount after a terrific market year.

Also, remember that if this strategy instructs you to cut your withdrawal amount by 10%, that doesn’t mean your total spending has to decrease by the same amount. That’s because any other sources of income, such as Social Security, are not affected.

If you want to learn more about this strategy and the research supporting it, you might check this out: Guardrails to Prevent Potential Retirement Portfolio Failure by William Klinger.

Annuity payouts

A final withdrawal strategy that can produce “guaranteed” retirement income is an annuity.

I have written extensively about annuities, so I’m not going to go into a lot of detail here other than to say that some, such as Single Premium Income Annuities, might be considered “fixed” withdrawals because they pay out a specified amount for life. The problem is that the real value of those payouts will vary based on inflation unless they adjust for it, and very few do.

Others, such as fixed index or variable annuities, might be considered variable because their principal value, and therefore the amount you can withdraw, can vary based on market performance.

All that said, using an income annuity as part of your “income floor” and in conjunction with some type of fixed or variable withdrawal strategy from your savings will make a lot of sense for some people.

Which strategy is best?

Fixed withdrawal strategies spend the same amount each year (adjusted for inflation), whether a fixed percentage or a fixed amount. You hope you won’t run out of money over a 20- to 30-year retirement.

The newer variable withdrawal strategies allow you to spend more when your investments are doing well and less when they aren’t. Recent research suggests that they may perform better than most fixed withdrawal strategies. Still, no withdrawal strategy provides absolute certainty that your savings will last. However, some strategies may be more suitable for you than others.

Variable-spending strategies make a lot of sense for those with low savings because they offer the best chance of ensuring that those savings last a lifetime.

Those with more savings or who only require a minimal income from savings may lean toward a fixed percentage or amount strategy.

It all comes down to choosing which strategy makes the most sense. Both fixed and variable strategies require you to start by deciding on a percentage or amount to withdraw based on your spending needs in retirement.

So, ultimately, it comes down to that; having a spending plan and practicing moderation and contentment, maybe more important than picking the perfect withdrawal strategy. You should be in pretty good shape if you can get both right.


👋 Hi, I’m Chris Cagle, the founder of Retirement Stewardship, a blog that focuses on the various aspects of retirement from a Christian stewardship perspective (1 Peter 4:10).

I write as a retiree who is dealing with the things I write about. I base most of the articles on my research and experience applying it to my situation and how it might apply to yours.

If you’re new here, check out the site introduction for an overview. You can also learn more about me.


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Redeeming Retirement: A Practical Guide to Catch Up (2021)
The Minister’s Retirement (2020)
Reimagine Retirement: Planning and Living for the Glory of God (2019)