This article is part of the Retirement Financial Life Equation (RFLE) Series. It was initially published on July 26, 2023, and updated in March 2026.
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 recommend adjusting your spending based on your portfolio’s value. It’s common sense: when your portfolio increases, you can spend more; when it falls, it’s better to spend less.
We’ve seen the “4% rule” questioned, and variable withdrawal strategies aim to address some of its shortcomings. 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.
The case for variable withdrawal strategies has strengthened considerably in recent years. Morningstar’s latest research (December 2025) shows that while fixed withdrawal strategies support a 3.9% starting withdrawal rate, flexible strategies can allow starting rates of 5.2% to 5.7%—a dramatic 33% to 46% increase in initial income. The trade-off, of course, is accepting year-to-year variability in your spending.
More importantly, Morningstar found that flexible strategies generally result in higher lifetime spending than fixed strategies, even though they leave smaller balances for heirs. For retirees focused on maximizing their quality of life rather than legacy, variable strategies are increasingly attractive.
Let’s look at the most common variable withdrawal strategies, updated with 2025 research findings.
Performance-based withdrawals
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/48% bonds and take the 3% in cash proceeds as income. (You will also need to plan and account for taxes.)
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 their flexibility in response to market performance. You can withdraw larger amounts during good times and smaller ones when the markets are down.
Another increasingly popular variable spending strategy adjusts annually based on year-to-year stock market valuations. It assumes that lower returns will follow higher market valuations and vice versa. (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 widely debated and has generated extensive literature, 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 have improved from their 2021-2022 lows) 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 riskier 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 (RMD method)
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 if born 1951-1959, or age 75 if born 1960 or later.)
But instead of waiting until RMDs are required, you could adopt this method voluntarily. 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.
Morningstar’s 2025 research tested the RMD approach as a voluntary withdrawal strategy and found impressive results. The RMD method allows for very high lifetime withdrawals—in fact, the highest of any strategy tested—because it naturally reduces withdrawal amounts during market downturns (since you’re withdrawing a percentage of a smaller balance) and increases them during good markets.
However, this comes with significant trade-offs:
- High cash flow volatility: Your income can swing dramatically year-to-year
- Smallest residual balances: This method leaves the least for heirs
- Counterintuitive spending: You may spend more in later retirement when you’re less active
The RMD method works best for retirees who:
- Have a substantial guaranteed income (Social Security, pension) to smooth volatility
- Are less concerned about legacy
- Want maximum lifetime spending from their portfolio
- Are comfortable with variable spending that increases in later retirement
A drawback for younger retirees 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 fixed withdrawal strategies can provide. To allow for that and some flexibility in the future, you may want to use a hybrid approach that starts with a higher fixed percentage but then adjusts based on some “guardrails.”
Morningstar’s 2025 research identifies the guardrails approach—specifically, the Guyton-Klinger method—as the best balance between higher withdrawals and livable cash-flow volatility. Here’s why it stands out:
2025 Performance Metrics:
- Starting withdrawal rate: 5.2% (vs 3.9% for fixed strategy)
- 33% higher initial income than fixed withdrawals
- Second-highest lifetime withdrawals of all methods tested
- Moderate cash flow volatility: Lower than RMD method, manageable for most retirees
- Optimal for 40% equity/60% bond portfolios
The guardrails approach is particularly effective when paired with Social Security or other guaranteed income, as this stable income base makes portfolio spending adjustments more tolerable.
How guardrails work: The Guyton-Klinger Method
One of the oldest and simplest guardrail methods is called the “better safe withdrawal method,” or “the 95% rule.”
You would start with a fixed annual withdrawal percentage, 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’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.
The Guyton-Klinger Guardrails Method (more sophisticated)
There are recently published, slightly more sophisticated guardrail methods. One of particular note was developed by financial planner Jonathan Guyton and computer scientist William Klinger—and it’s the version that Morningstar tested and recommends.
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. Morningstar’s 2025 testing used a 5.2% starting rate for a 40/60 portfolio, which is notably higher than the 3.9% fixed rate.
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 5.2%, your lower guardrail would be 4.16%, and your upper one would be 6.24%.
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 a $500K portfolio example.
In year one, draw 5.2% or $26,000. In year two, your portfolio lost 10% ($50,000), and Inflation in year one was 3%. Your inflation-adjusted withdrawal amount is $26,780 ($26,000 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 5.95%. Since that’s higher than the 4.16% lower guardrail and lower than the 6.24% upper 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 $26,780 / $400,000, or 6.7%, higher than our upper guardrail of 6.24%. That signals that you need to reduce your withdrawal amount in year two by 10 percent to $24,102 ($26,780 x 0.9), which is 6.0% of your $400,000 current portfolio value, and now below the upper guardrail of 6.24%.
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. This is a crucial point: Morningstar’s 2025 research found that the guardrails approach becomes dramatically more effective and tolerable when you have a solid guaranteed income base.
Example: If you have $36,000 in Social Security and $26,000 in portfolio withdrawals ($62,000 total), a 10% cut to portfolio withdrawals only reduces your total income by 4.2% (to $59,400). That’s much more manageable than it sounds.
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.
Additional flexible strategies tested in 2025
Morningstar’s 2025 research tested several other flexible approaches beyond guardrails:
1. Forgo inflation adjustment after portfolio loss
This strategy modifies the fixed withdrawal rate strategy by applying annual inflation adjustments, except in years following portfolio losses.
Morningstar found that it supported a starting rate of ~4.0-4.3% (a modest improvement over fixed) and higher lifetime spending than the fixed approach, providing a good balance for conservative retirees.
It’s best for those who want modest improvements over fixed withdrawals, with minimal added complexity or volatility.
2. Actual spending method
Based on research showing retirees naturally reduce spending as they age (T. Rowe Price reports spending declines by about 1% per year in real terms), this method accounts for declining real spending.
This could work for retirees who recognize they’ll likely want/need to spend less in their 80s and 90s.
3. Delayed Social Security combined with guardrails
You delay Social Security to age 70 (increasing benefits by approximately 24-32% over filing at Full Retirement Age), then use a higher guardrails withdrawal rate from the portfolio.
Morningstar found that this strategy can support starting withdrawal rates up to 5.7%, mainly because the higher Social Security benefit provides a crucial income floor. The challenge is that it requires the ability to fund early retirement from savings or other income.
This only works if you can avoid excessive portfolio withdrawals while delaying Social Security. If delaying means taking much larger withdrawals (5%+) from savings, you may be better off taking Social Security on time and preserving portfolio growth.
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 (SPIAs), 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.
Current SPIA rates (December 2025) are approximately 8.1% for a 73-year-old—the highest payout rates in over a decade and significantly higher than any systematic withdrawal strategy. However, most SPIAs don’t adjust for inflation, so the real value of payments declines over time.
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. Fixed indexed annuities (FIAs) currently offer caps of 10-11%, much improved from the 4-6% caps common in the mid-2010s, though expected returns still average only 3-6% annually.
Variable annuities continue to carry high costs (3.0-4.5% annually with income riders), making them less attractive than other strategies for most retirees.
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—particularly those with limited savings who need maximum guaranteed lifetime income. For detailed analysis, see my complete annuities series and personal analysis.
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.
Variable withdrawal strategies allow you to spend more when your investments are performing well and less when they aren’t. Recent research strongly suggests they outperform most fixed-withdrawal strategies in lifetime income, though they leave smaller balances for heirs.
Based on Morningstar’s comprehensive 2025 testing, here’s guidance on which strategy works best for different situations:
For retirees seeking to maximize their spending power while maintaining flexibility, guardrails (Guyton-Klinger) work best with a 5.2% starting rate, particularly for those with Social Security or pensions covering 40-60% of expenses. This approach allows higher initial withdrawals than traditional fixed strategies while adapting spending to market conditions, though it requires accepting moderate cash flow variability and smaller bequests.
The RMD method pushes this further for retirees prioritizing maximum lifetime income over legacy goals, delivering the highest total dollars spent across retirement but with high volatility and minimal residual balances—ideal for those with strong guaranteed income bases who aren’t concerned about leaving assets to heirs.
For conservative retirees who prioritize stability and predictability, two approaches dominate. The “forgo inflation after loss” strategy offers modest improvements over fixed withdrawals (4.0-4.3% starting rate) while limiting cash flow disruption, making it suitable for those uncomfortable with significant spending changes year-to-year.
The traditional fixed 3.9% approach provides ultimate simplicity and predictability, appealing to retirees with surplus assets or strong bequest motives who value knowing exactly what they’ll spend each year, though this conservatism typically results in significant underspending and the largest bequests—essentially leaving money on the table for the benefit of heirs.
For those with specific constraints or goals, specialized strategies apply. Retirees who can delay Social Security to age 70 while using portfolio withdrawals for ages 65-70 achieve the highest combined total retirement income through delayed Social Security plus guardrails (up to 5.7% starting rate), though this requires discipline and alternative income sources during the delay period.
Those with limited savings under $300,000 and high essential expenses should seriously consider partial or full annuitization to maximize guaranteed income, accepting the trade-offs of reduced liquidity and assets passing to the insurance company rather than heirs—a particularly relevant option for single individuals without legacy concerns who need maximum income security.
Variable-spending strategies make the most sense for those with low-to-moderate savings because they offer the best chance of ensuring that those savings support maximum lifetime spending.
Those with substantial savings relative to spending needs or who only require minimal income from savings may lean toward a fixed percentage or amount strategy—particularly if leaving a legacy is important.
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.
Bottom line
Variable withdrawal strategies have become increasingly attractive based on 2025 research, offering 33-46% higher starting withdrawal rates than fixed strategies while delivering higher total lifetime income.
But remember: The goal isn’t perfection—it’s wise stewardship. Choose a strategy aligned with your priorities (income vs. legacy), risk tolerance, and life situation. Then implement it faithfully while remaining flexible enough to adjust as circumstances change. That’s biblical stewardship in action: making the most of what God has entrusted to us while maintaining contentment and generous hearts.