If you want your money to last as long as possible in retirement, you will need a well planned withdrawal strategy.

Lucky for you there are many methods available, and you can choose the one that best suits you. In fact, you can even use a combination of some of the methods if that works for you.

The important thing is you understand the pros and cons of each method and are deliberate in your choice. You want your money to be used in a way that allows you to maintain your desired lifestyle.

Too many people sleepwalk their way through spending their savings and their money doesn’t last as long, or they have less money than they may have otherwise. It is often not easy replacing work income with retirement income so many don’t even try.

We will go through some of the most common retirement withdrawal strategies. Note that drawdown and decumulation are often used interchangeably with the word withdrawal.

1/. The dollar plus inflation strategy

What is the 4% rule?

We will start with the ever popular % rule. The most common % is 4% popularized by a William Bengen study that concluded that a 4% withdrawal rate with 50/50 mix of shares and bonds was over 90% successful over all 30 year periods in the study.

With a fixed percentage withdrawal strategy, in the first year of retirement the retiree withdraws a fixed percentage from their investment portfolio. In the years that follow, you increase the amount you withdraw by the previous years inflation rate, regardless of the performance of your investments.

An example of the 4% drawdown strategy

If you choose to use a 4% withdrawal amount on your $500,000 of investments, you would withdraw $20,000 in your first year of retirement ($500,000 x 4%). If inflation was 3% in the first year of retirement, you would withdraw $20,600 ($20,000 + 3%) for your second year spend, and so on.

Pros of the 4% drawdown strategy

The pros of this strategy are that it is easy to implement/calculate, it can work well if you expect to spend the same amount each year throughout your retirement, and the amount of money you receive each year is predictable.

Cons of the 4% drawdown strategy

The main con is that it ignores market conditions. You could end up spending too much during down markets or too little during up markets. You are more likely to end up without enough or too much money using the % rule. A big risk is the scenario of spending too much early in retirement when your investments are the highest and investment returns are the worst, otherwise known as sequence of returns risk. Another downside is that the rule assumes a 50% allocation towards shares and 50% towards bonds. If your asset allocation is more aggressive or less aggressive, the % rule may mean you run out of funds too soon or have more than you will ever need. The study also assumed a 30 year retirement, so if your retirement is longer or shorter than that, it will affect your ability to take more or less than 4%. Finally, it is quite rigid. Not many retirees (or even non retirees) spend exactly the same amount each year adjusted for inflation. Some years we have high spend and other years lower spend.

2/. % of investment balance strategy

What is the % of investment balance strategy?

It is where you withdraw a fixed percentage from your investment portfolio each year. The amount you withdraw each year can go up or down depending on how your investments performed.

An example of the % of investment balance strategy

If you choose to use a 4% withdrawal amount on your $500,000 of investments, you would withdraw $20,000 in your first year of retirement ($500,000 x 4%). If your investments reduced to $400,000 over the course of the year, you withdraw $16,000 for your second year of retirement. Or if your investments increased to $600,000 you would withdraw $24,000.

Pros of the % of investment balance strategy

Like the 4% rule, this one is easy to calculate and implement. With this strategy, you are much less likely to run out of money or end up with too much money. Because you are withdrawing percentages of your investment balance, you won’t over or underspend as much as you may with the 4% rule.

Cons of the % of investment balance strategy

The main con is that your year to year spend is unpredictable. Your spending could vary (both up and down) by a lot from year to year dependent on how your investments perform. It can be hard to plan your lifestyle around such unpredictable income. The amount you withdraw could also be far too little to fund your lifestyle if assets perform poorly or far too much to fund your lifestyle if assets perform very well. This strategy doesn’t work well if you don’t have room in your budget to cut.

3/. No spend inflation in down year strategy

What is the no spend inflation strategy?

It is much the same as the 4% rule where you withdraw a fixed percentage from your investment portfolio in the first year of retirement. The next year you withdraw the same amount plus inflation except when your investment returns are negative. If your investment returns are negative for the year, then you would keep your spend the same as the previous year and not account for inflation. Only increasing your spend with inflation again when investment returns are positive.

An example of the no spend inflation strategy

If you choose to use a 4% withdrawal amount on your $500,000 of investments, you would withdraw $20,000 in your first year of retirement ($500,000 x 4%). If inflation is 3% and your investments reduced to $400,000 over the course of the year, you withdraw $20,000 (no increase) for your second year of retirement. Or if your investments increased to $600,000 you would withdraw $20,600 (inflation adjusted increase).

Pros of the % of the no spend inflation strategy

Like the 4% rule, this one is easy to calculate and implement, and is good if you expect your spend to be much the same from year to year. The additional pro though is that you give your investments a slightly better chance of lasting longer than with the 4% rule because you are spending slightly less. With this strategy you are somewhat using market conditions to determine how much to spend, although using inflation as an adjustment is not as significant in using market conditions as the % of investment balance strategy.

Cons of the no spend inflation strategy

All the same cons as the dollar plus inflation (% rule) strategy apply here. However, the chances of running out of money are slightly lessened by the fact that with this strategy you are spending less in down years in the market than you would with the dollar plus inflation strategy.

4/. The guardrail strategy

What is the guardrail drawdown strategy?

Based on the research of Jonathon Guyton and William Killinger, the conclusion is that traditional methods of retirement drawdowns, such as the 4% rule, are too conservative. Essentially meaning that retirees are taking out too little money and not enjoying their retirement as much as possible.

Their solution is to use more of a dynamic based approach, which is where a retiree adjusts their withdrawals based on the performance of the markets. Increasing spend during good years and decreasing spend in bad years. Much the same as the % of investment balance strategy.

The key difference being this strategy uses guardrails, which is a fancy way of saying upper and lower limits. The % of investment balance strategy could see you increasing or decreasing spend by 30% if investments go up or down by 30% respectively. However, the research on the guardrail strategy suggests that once your withdrawal rate goes up or down by more than 20%, you increase or decrease the amount of income taken by 10%.

With the guardrail strategy there are also no spending increases with inflation in years after negative investment returns.

In their research. The guardrail calculation is not used for the last 15 years of life expectancy. This is because reducing income at this point was found to have little impact on the success of having enough money. The strategy just reverts to a dollar plus inflation strategy at this point.

The Guardrail research that lead to this strategy was based on running tests on share allocations of 50%, 65% and 80%. The paper concluded that the starting withdrawal rate would need to be as low as 4.6% for 50% shares and 5.2% for 65% shares.

An example of the guardrail strategy

If you choose to use a 4% withdrawal amount on your $500,000 of investments, you would withdraw $20,000 in your first year of retirement ($500,000 x 4%). Say your investment balance increases to $700,000 four years later. If inflation has averaged 3% over the four years, your spend would typically be approximately $22,500 by year five just using the % of investment balance strategy. But because we now have guardrails for the size of investment returns, you have add that in. Your withdrawal rate in year five is now 3% ($22,500/$700,000). This is 25% less than your initial 4% withdrawal rate. As such, you can now increase your spend by 10% which equals $24,750 rather than $22,500. $24,750 is now your new spending benchmark moving forward.

Or instead of $700,000 let’s assume that the portfolio has actually decreased from $500,000 to $350,000 over the same 4 year period with 3% average inflation. Your withdrawal rate in year five would be 6.4% ($22,500/$350,000) which is 60% more than the original 4% withdrawal rate. As this exceeds the 20% upper limit (guardrail), then your income should reduce by 10% for year five from $22,500 to $20,250. $20,250 is your new spending benchmark moving forward.

Pros of the guardrail strategy

It should make your retirement savings last longer by not only being a percentage of your investment balance, but also by placing upper and lower limits on how much your spend can increase and decrease by. This strategy also means you are less likely to under spend as much during your retirement as you would with a fixed withdrawal or a dollar plus inflation strategy. Finally, because the guardrail is typically set at 20%, it means that smaller increase or decreases in withdrawal rates mean the guardrail calculation doesn’t apply. This means you don’t make spending adjustments for more minor market changes.

Cons of the guardrail strategy

This is quite a bit more difficult to calculate than other strategies. It does require a small amount of time and brainpower to figure out how much you should withdraw each year. This strategy, because it is tied to investment performance, could mean higher increases in spend than you actually need or want, as well as higher decreases in spend than you are willing to make. In a scenario where you experience a recession early in retirement and don’t recover from it, you could potentially permanently be spending much less than you need to survive because even though the withdrawal rate stays within upper and lower limits, the investment balance may still be low. For example, 4% of $200,000 is not much good if you want to spend closer to 4% of $500,000. This strategy doesn’t work well if you don’t have room in your budget to cut.

5/. Vanguard dynamic spend strategy

What is the Vanguard dynamic spend strategy?

A retirement drawdown strategy created by the behemoth index fund provider Vanguard. Designed to give retirees consistency in the amount they can spend from year to year whilst also being sensitive to investment returns and inflation. This strategy tries to incorporate the best of both the worlds. The predictability of regular and consistent spending amounts of the dollar plus inflation strategy (4% rule) and the market sensitivity/consideration of the % of investment balance strategy.

It tries to do this by starting off with an initial withdrawal rate, say 4%. Then it looks at investment returns and uses upper and lower guardrails called ceiling and floor. You could say it takes a bit from each of the previous four strategies.

The ceiling is the most you are willing to increase spend by in years with positive investment returns. The floor is the most you are willing to decrease spend by in years with negative investment returns. Typically you won’t want to go more than 10%.

The creators of this strategy came to the conclusion that a portfolio of 50% shares and 50% bonds would be ok with a 4.8% starting withdrawal rate at least 85% of the time. This is based on the running of hundreds of forward looking simulations. This is a higher withdrawal rate than the 4% rule, but the 4% rule does have more than an 85% chance of success so not quite comparing apples to apples. Regardless, because of the dynamic nature of this strategy, you would expect to be able to get away with a slightly higher withdrawal rate than with the 4% rule.

An example of the Vanguard dynamic spend strategy

Again we will assume an investment balance of $500,000 and an initial withdrawal rate of 4%. We will assume 3% inflation, a ceiling of 5% and a floor of 3%. With these numbers we can calculate how much we can spend.

Our first year withdrawal is just $20,000. 4% of $500,000. For our second year withdrawal we first have to calculate the inflation adjusted amount of spend which is $20,600 ($20,000 x 3%). From there we can calculate the ceiling which is $20,600 + 5% = $21,630. That ceiling would be the most we could spend in year two whether the investment portfolio goes up 1% or 100%. To calculate the floor, we subtract 3% from $20,600 which equals $19,982. This is the least we want to spend in year two whether the investment portfolio goes down by 1% or 100%.

Next you take your investment balance from the end of the year, let’s say $540,000. You multiply your investment balance by the withdrawal rate. So $540,000 x 4% = $21,600. $21,600 sits within the ceiling ($21,630) and the floor ($19,982) so $21,600 would be your spend for your second year of retirement.

What if your investment balance went from $500,000 to $450,000? That would give you a number of $18,000 ($450,000 x 4%). $18,000 is less than the $19,982 floor. That means your spend for your second year of retirement would be $19,982. Since you set a floor, you aren’t willing to go below that amount. If your calculation is higher than the $21,630 ceiling, then your spend wouldn’t go above $21,630.

Pros of the Vanguard dynamic spend strategy

You can arguably start off with a higher withdrawal rate than with the dollar plus inflation strategy because this strategy takes into account investment returns and also places limits on spend increases. Because this strategy has upper and lower limits it also means there is not as much potential variability in spend from year to year as you may get with the % of investment balance strategy. Certainty of income is an important consideration. Finally, because down years in the market are considered, your chances of money lasting are better.

Cons of the Vanguard dynamic spend strategy

It can be complex to calculate. It may not work too well if your ceiling or floor is set too high. There is not much guidance from Vanguard on the most optimal floor and ceiling percentages, nor is there any historical back testing of this strategy to see how successful it would have been in the past. Also, like the % of investment balance and guardrail strategies, because this strategy is tied to investment performance, you could get to the position, if investment returns are poor, of having very low spend later in retirement. This strategy doesn’t work well if you don’t have room in your budget to cut. Finally, although there is less variability in spend than with a % of investment balance strategy, there can still be a lot more variability in spend than a dollar plus inflation strategy. In trying to get the best of both strategies it kind of finds itself middling.

6/. Bogleheads variable withdrawal strategy

What is the Bogleheads variable withdrawal strategy?

This strategy helps calculate how much you can spend per year in retirement, expressed as a percentage of your total investments, without going broke! It looks at how long you are likely to be retired, as well as expected investment returns, to come up with a desirable withdrawal amount (%).

The % you withdraw from your savings each year with this strategy is variable. It increases each year the closer to life expectancy you get. Think of it as a moving (increasing) safe withdrawal rate.

To know what percentage of your savings to withdraw each year, the Bogleheads strategy uses a table with pre determined percentages based on your age and asset allocation. The calculation assumes you live to age 100.

An example of the Bogleheads variable withdrawal strategy

Still with an initial investment balance of $500,000, we will assume we want to retire at age 63 with a asset allocation of 50% shares and 50% bonds. That is 37 years from age 100 so our first year withdrawal would be 4.7% (using the Boglehads table) of $500,000 which equals $23,500. The second year withdrawal would be 4.7% of our investment balance. Third year would be 4.8% and so on. Each year you would need to check what your asset allocation is to determine the ideal withdrawal percentage.

If you don’t expect to live to age 100 then you can adjust how you look at the table. For example, still with a 50/50 portfolio of shares and bonds, we will assume you expect to live to age 90. That is just 27 years of retirement. You would then use the percentage withdrawal for age 73 rather than 63, which is 5.6%.

Pros of the Bogleheads variable withdrawal strategy

It is incredibly simple to calculate how much you should withdraw each year. It is tied in with market conditions. So when your investments gain in value, you spend more the following year and when your investments drop in value you will likely spend less. It is designed that you can’t run out of money, although a percentage of a low amount is not good. For example, 6% of $50 is not much good in retirement. I like how this strategy has different withdrawal rates based on different asset allocations. It takes into account how aggressive or conservative you are with your investments which is important as a higher growth oriented portfolio is more likely to be able to handle higher withdrawal rates over the long run. Finally, this strategy has been backtested against historical investment returns over a range of time periods and asset allocations.

Cons of the Bogleheads variable withdrawal strategy

Like other percentage based methods, it is highly variable. Spend can go up or down year to year by a lot if your savings go up or down significantly. This strategy also relies on you living exactly as long as you predict. We know that is unlikely. Then there is the real risk of spending too much too soon (or too little too late). If you live longer than expected, where will your money come from? This strategy also ratchets up spending immensely in your later years, where in reality, most retirees spend more early in retirement and less later. It is not realistic for most who want to spend more on discretionary expenses earlier. If you don’t have any room in your discretionary spend to cut, then this strategy doesn’t work well during down markets too.

7/. Yale endowment strategy

What is the Yale endowment strategy?

The Yale endowment strategy is pretty similar to the Vanguard dynamic spend strategy, with floors and ceilings, but just with a different method of calculating spend. It uses a combination of percentage withdrawal of investment balance, and dollar plus inflation too.

However it calculates 100% of your second year spend as:

70% of spend is last years spend plus inflation
30% of spend is 4% (or whatever your desired withdrawal percentage is) of your current investment balance.

This strategy also uses ceilings and floor so you don’t spend more or less than you need or are comfortable with. You can also decide whether to use one year investment returns to calculate your 30% spend amount or you can use the previous 3 year average to smooth things out a bit.

An example of the Yale endowment strategy

We will assume an investment balance of $500,000, an initial withdrawal rate of 4%, inflation of 3%, a ceiling of 5% and a floor of 3%.

First year withdrawal is just $20,000 (4% of $500,000). Let’s assume at the end of year one your portfolio has increased to $560,000.

70% of spend is $20,000 + 3% inflation which equals $20,600. $20,600 x 70% = $14,420.
30% of spend is 4% of $560,000 which equals $22,400. $22,400 x 30% = $6,720.

Second year spend is therefore $21,140 ($14,420 + $6,720).

Before we commit to that spend though we have to see if it exceeds our upper guardrail of 5%. 5% of $560,000 investment balance is $28,000. No. So $21,140 is our second year spend. If the total spend using the Yale formula is more or less than the upper or lower guardrail respectively, then we would use the upper or lower guardrail amount as our years spend.

Pros of the Yale endowment strategy

I like how the Yale strategy tries to achieve fairly consistent spend whilst still leaving an element based on investment returns as well as having guardrails. Like the Vanguard dynamic spend strategy it tries to get the best of both dollar plus inflation and % of investment balance strategies but I think it does a much better job. By relying less on investment returns you get to have more reliability around how much you can spend, but still get to account for good and bad years in the markets. You won’t have such large positive and negative upswings in spend.

Cons of the Yale endowment strategy

This strategy is even trickier to calculate than the Vanguard dynamic spend strategy. The other downside is that because 30% of the calculated spend is based on investment returns, your year to year spend may be somewhat variable which can make it slightly difficult to make plans, although the variation here is much less than other methods such as the % of investment balance, Guardrail, and Vanguard strategies which are much more aligned with investment returns.

8/. Shiller CAPE strategy

What is the Shiller CAPE strategy?

CAPE is short for Cyclically adjusted price to earnings ratio. It’s the price to earnings ratio of the index you are investing in, however it is the average of the last 10 years earnings rather than just the last years as one year returns provide too much noise. 10 years smooth things out a bit more.

The theory is that historically higher than average returns over a 10 year period will lead to worse than average returns in the future as things tend to balance out over time. Whether that eventuates is yet to be seen but historically there is a lot of merit to this.

There are varying percentages used to calculate a good withdrawal rate. Big ERN is conservative and Michael Kitces is much less conservative. I sit somewhere in the middle.

To calculate the ideal spend using the CAPE strategy I divide the Shiller CAPE ratio from 1.5 and turn it into a percentage. Then I multiply by half. Finally, I add 1.

Big ERN uses 1 rather than 1.5 which gives a significantly lower withdrawal amount. Michael Kitces uses a withdrawal rate of 4.5% for a CAPE greater than 20, 5% for a CAPE of 12-20, and 5.5% for a CAPE of less than 12.

An example of the Shiller CAPE strategy

If the CAPE ratio is 30, then you would go 1.5/30 = 5%. Half of 5% is 2.5%. Plus 1 is 3.5%. Your first years spend would be 3.5% of your retirement balance. Your second year spend would be calculated exactly the same way, except the CAPE number and retirement balance numbers will be different.

Pros of the Shiller CAPE strategy

Mean reversion is real. What goes up must come down and what goes down must come up in the markets. Of course, as a whole. We are not talking on an individual company or market basis, but a diversified basis. The CAPE ratio is a strong indicator of future returns and therefore an accurate predictor for how much is a good amount to spend. This strategy is tied to expected investment returns so there is an element of withdrawals being tied in with your expected investment balance. In addition, the CAPE ratio doesn’t change a lot on a year to year basis since it is a 10 year average. This means your spend from year to year is fairly predictable and you won’t see as large upswings or downswings in spend than you might see with the other investment performance based withdrawal strategies.

Cons of the Shiller CAPE strategy

It is quite a complex calculation for some. It also requires annual updating of the CAPE ratio. The CAPE ratio can be difficult to find for some indexes and shares. If CAPE is high you may not be able to spend as much as you want or need. Finally, although future returns may revert to the average, the problem is when. It could be 5 years, 10 years, or even 20 years plus. That is potentially a long time to see the results from using the initial CAPE related withdrawal rate. This may mean spending too much or too little for too long, running out of money or spending too little since this strategy has no connection to your current investment balance.

That’s all of the main withdrawal strategies worth consideration.

You may be wondering about the bucket strategy where you ‘pour’ assets from shares to bonds to cash as you get closer to needing the money. However, I see the bucket system more of a way of deciding on an ideal asset allocation for your situation, rather than a drawdown strategy.

I will go over how I use the bucket system with my clients in the near future, but I see the bucket system as a way of deciding where to invest, whereas the withdrawal strategies mentioned today are useful in deciding how much to spend.

It is a bit tricky to compare the different drawdown methods by running scenarios. Unfortunately the investment returns for each drawdown method can’t be the same due to the randomness of the simulations. I could make the returns the same each year (without ups and downs) but then the results would be very unreralistic as that is not how the real world operates. The randomness produces different average investment returns for each drawdown method which results in different spend amounts, different withdrawal rates, and different ending investment balances. There is also the fact that even if two strategies have the same or similar investment returns, the returns could happen in a different sequence, resulting in vastly different spend amounts and investment balances making for unequal comparisons.

Instead we will try and summarise some real world expectations for each strategy with some bullet points. I ran 10 random simulations for each strategy which is by no means exhaustive but still random enough to glean some insights.

Notes on the performance characteristics of the different drawdown strategies

% rule + inflation notes

This strategy had the second highest withdrawal rate and annual spend, behind the Bogleheads strategy. Because with the % rule you spend the same each year regardless of market performance you get to keep spend up in down and up markets.
There is no difference year on year as to how much you spend with this strategy. Unlike the % of investment balance strategy, there is no year to year fluctuations so you can plan much more easily.
The downside is that this strategy tends to deliver the second lowest end balance, behind the Bogleheads strategy. If it is enough they may not matter to you, But it’s important to those who want more of a buffer or perhaps to leave some inheritance. If your withdrawal rate is too high or investment performance is especially poor, then this strategy may sometimes perform even worse than the Bogleheads strategy in terms of your end balance (less than zero).

% of investment balance notes

Annual spend on average is amongst the lowest with this strategy. This is because a lot of portfolios go down in value or don’t increase as fast as inflation whilst we are drawing down money. Yet this strategy uses a fixed withdrawal percentage. Well, a fixed percentage of a decreasing or slowly increasing balance is not a lot. At least not as much as some of the other strategies that have higher withdrawal percentages due to up year and/or down year guardrails.
This strategy often has the highest balance at the end of life. This is because of the low withdrawal rate in the good times in the market, which are more frequent than the bad times. A high balance at the end isn’t necessarily a positive either. Not if you want to use your money more effectively during your living years.
This strategy also has the second highest fluctuations in spend. What I mean by that is a large difference between the highest spend year and the lowest spend year. The difference likely only greater in the Bogleheads strategy. This is because there is no down year guardrails in place. This would mean very large cuts to spend in down years. And because of the lowish withdrawal rate relative to other strategies.
Technically you can never run out of money with any strategy that uses a percentage of your savings, as even a percentage of a low number is still a positive number. The thing to be cautious of from the strategies that use a percentage of investment balance such as this one, guardrails, and Vanguard dynamic spend, is that they often claim you don’t run out of money. Although true, you can potentially spend many years with very low spend. Much below what you need to live. Just something to be weary of.

No spend inflation in down year notes

As it is similar to the % rule, the range between your highest spend and lowest spend years is small, so lots of predictability in how much you can spend.
You should expect a slightly smaller withdrawal rate than the % rule strategy but still high relative to the other strategies.
Hence most likely one of the lowest end investment balances on average with this strategy as it closely mimics the % rule and doesn’t react to investment performance.

20% Guardrail notes

Average spending levels and withdrawal rate of around halfway between the % rule and the % of investment balance strategy.
Quite a low range of spend between highest spend and lowest spend years. Not much more than the no spend inflation rule over 20 and 30 year periods. Over 40 year periods however, the range is much higher.
The end investment balance is often middle of the pack. Not the highest but not the lowest.

Vanguard dynamic spend notes

Not quite as high a range in year to year spending than the % of investment balance strategy but not too much less. Still a lot of unpredictability in year to year spend.
A withdrawal rate and annual spend that on average typically lies between the % of investment balance and the no spend inflation in down year strategies.
Tends to have the highest end balance with a 3% initial withdrawal rate, and the 3rd lowest balance for 4 and 5% starting withdrawal rates. Does worse with higher withdrawal rates as the annual spend has a lot of weight tied to how much you withdraw from your portfolio regardless of investment performance. Much like the % rule.

Bogleheads variable withdrawal strategy notes

The Bogleheads strategy will often have the highest withdrawal rate and the highest annual spend. This is because this strategy starts off with a high initial withdrawal rate which continues to ratchet up as you age until you get to a 100% withdrawal rate in your last year. Almost a die with zero approach to spending money.
The Bogleheads strategy also has the largest range in spend. Because the strategy uses a high withdrawal rate, this would mean high withdrawals in both good and bad years in the financial markets. You would need to be ok with fluctuations in spending to use this strategy.
I would expect of all strategies, the Bogleheads strategy to be the most likely to run out of money too soon, especially in down markets or if you live longer than expected. You would have a lot of fun with spending along the way though!

Yale endowment method notes

Quite a high range in spend between the highest and lowest spend years but not as bad as the similar Vanguard strategy. This is because 70% of spending in this strategy is the same as the previous year. Only 30% of spend is based on investment returns.
Annual spend and withdrawal rate are often amongst the lowest with this strategy. Similar to the % of investment balance strategy, due to the high weighting of this strategy on how your savings are looking.
The upside is annual spend doesn’t go as low as it does with other % of investment balance withdrawal strategies as it has a high weighting towards last years spending.

Shiller CAPE method notes

This is the only strategy that forward looking simulations can’t be run for. As future investment returns are unknown, we don’t know what the cyclically adjusted price to earnings ratio will be.
During periods of high share market valuations you would have very low spend and withdrawal rate relative to other strategies. During periods of low valuations, you would have high spend and withdrawal rate.
Despite potentially a large difference between your highest and lowest spend year in retirement, they would likely be many years apart due to the fairly slow moving CAPE ratio. Because it is a 10 year average it moves pretty slowly even with significant year on year differences in investment returns and price to earnings. This slow moving nature does make it easier to plan your spending year to year relative to the much more dynamic % of investment balance, guardrails, and Vanguard strategies.
Because this strategy ignores your actual investment balance, then you could end up with way too much money. You could have spent more than you did. The opposite is also true. You could spend too much. However, that is less likely as if current CAPE is low or high, your initial withdrawal rate will reflect that. This reduces the chances of running out of money since CAPE is a fairly good indicator (not exact) of future returns.

Other Factors to consider when deciding on retirement withdrawals

Age

The longer your retirement the more recessions and economic drawdowns there will be. You will need to be more conservative with your planning and spending and arguably more aggressive with your asset allocations.

The less time you have, arguably you will be able to spend more.

As a guideline, the Bogleheads strategy uses withdrawal percentages based on your age and length of retirement and you can see when 15 years from the end of life (with a 50/50 asset allocation), this strategy uses a 8.4% withdrawal rate. When 30 years it uses 5.2%.

Age matters.

Life expectancy

Similar to age, but slightly different.

Someone can retire at age 60 and be retired for 40 years, whereas someone else could be retired for 20 years or less. All down to life expectancy.

Life expectancy is one of those things that no one knows for sure. But there are indicators as to the odds of someone living to a certain age. And that is all retirement planning is. Being happy with the odds of our decisions.

Some things to think about that might help you come up with a reasonable life expectancy number include:

What is your current age? Younger people have higher life expectancies due to people living longer due to developments in science, knowledge, and health.
What is your family history?
How is your current health and diet?
Do you expect to remain healthy and challenged in retirement? If you don’t use your body and brain it will diminish.

Whatever number you think add some years for some buffer and consider the odds of making it to that age. Are you comfortable with that number?

Then as you age, you can adjust the number accordingly (up or down) as more information comes to hand.

NZ Superannuation or other income

Will you be earning any income in retirement? Work, NZ Super, rental income, an inheritance etc. For how long?

Don’t forget as this affects how much you may need to save for your retirement and could be less than you think.

It also affects which drawdown strategy is best and how much you need to withdraw (if any) for your retirement spending.

If you can get away with a low withdrawal rate for longer then you will be able to follow a strategy that allows for more spend in retirement.

Conversely, if you are still some time from retirement it can be prudent to assume less income than you think. Maybe you can’t work for health or family reasons. Maybe NZ Super is changed to a later age or means tested. Things don’t always go to plan and it is best to be conservative.

Variability in spend

Some of the strategies mentioned can potentially have a significant change in spend from year to year. In particular the % of investment balance, guardrail, and Vanguard strategies. And to a smaller extent the Yale strategy.

This is an important consideration for some. I understand the need for predictability for many people. Knowing what you are going to spend from year to year is important.

Strategies that do have this variability require you to have room in your budget to cut during poor performing years in the markets. If you don’t have that ability, or your discretionary spend makes up a small proportion of your total spend, then the strategies that predominantly rely on a percentage of your investment balance are not very good for you.

Conversely, if you do have quite a bit of discretionary spend and you are ok with year to year fluctuations, these strategies are better suited.

Inheritance

For some, leaving an inheritance is an important consideration. Making sure there is money left over for your preferred recipients.

This may be more important for some than spending more on yourself in retirement.

In these instances, you want to be really conservative with your spending and your strategy planning. For example, you may prefer a 3.5% withdrawal rate rather than 4%. Or perhaps you may like to subtract 0.5 to 1% off each of the Boglehead withdrawal rates. Maybe you will have really large lower guardrails and small higher guardrails so you embrace more of the losses in markets but not much of the gains. Whatever change you like to allow for a higher chance of having the amount of money you want left over.

There are also some strategies that don’t align for those wanting to leave an inheritance. The % of investment balance strategy doesn’t work too well as it doesn’t allow for leaving any money behind. Likewise, the guardrail, Vanguard, and Bogleheads strategy. The dollar plus inflation, Yale, and Shiller CAPE strategies possibly best for those wanting a better chance to leaving money behind. The other strategies can work, especially in good markets, but you would need to be more flexible in average or worse performing markets, by slightly altering the rules such as lower withdrawal rates and/or more favourable guardrails.

Asset allocation and tolerance for risk

Everyone has different thoughts on risk. Some are comfortable with a high proportion of shares. Others prefer mostly cash.

No matter the drawdown strategy, mostly cash won’t work well for most unless you don’t live long or have saved up around 50 times your annual spend.

Most others sit somewhere between the two extremes of all cash and all shares. It is where you decide that mix is that may determine the best drawdown strategy.

Many of the strategies came up with their recommended withdrawal rates and rules by using asset allocations of at least 50% shares, if not more. If you are more aggressive or more conservative than that, then you will likely need to be more conservative with your planning than the rules recommend. Using lower withdrawal rates or more conservative upper (lower amount) and lower (lower amount) guardrails. Otherwise without these conservative changes, there will be more instances of the strategy failing than otherwise.

The good thing about the Bogleheads withdrawal strategy is that it has different withdrawal percentage recommendations for different asset allocations. Other strategies don’t provide that flexibility but you can make your own flexibility if your asset allocation differs much from 50/50.

Time, knowledge or willingness

Some people just don’t have the time, knowledge or willingness to worry about implementing a drawdown strategy. You really need all three to manage your retirement withdrawal with any modicum of success. If you lack just one of time, knowledge or willingness, then your retirement planning suffers.

A couple of the strategies do help on the time and willingness side of things though as they are very easy to implement. The dollar plus inflation and % of investment balance strategies are the easiest to implement. For dollar plus inflation, just decide on a percentage you are initially comfortable with and increase your spend each year with inflation. No need to worry about investment balance or investment returns. Just need to check on the previous years inflation rate and increase (or decrease) your spend accordingly. The % of investment balance strategy just needs you to know what your investment balance is at the end of the year and to plan to spend a percentage of that in the upcoming year.

Just slightly more time consuming and difficult, but still quick and easy, are the no spend inflation and Bogleheads strategies. The no spend inflation strategy requiring you to know not just how much inflation was for the year, but also if your investments went up or down in value (after excluding any withdrawals you made). The Bogleheads strategy requiring you to know your asset allocation, your timeframe and your investment balance.

The remaining strategies are quite a step up in terms of time and difficulty.

Lucky for you I have developed a spreadsheet with each of the drawdown strategies discussed today that you can play around with. You can find it on the retirement calculators page with a description on how to use it. It is called the retirement drawdown strategies calculator.

Final thoughts

Wow, 7.200 words later here we are. Must be time to put a bow on this one.

I just wanted a one stop place for someone to come and get a general understanding of different types of strategies, how they work, and the pros and cons of each.

Most people in retirement don’t really follow in such rules. It’s not reality. Unexpected spend happens. Unexpected income happens. We don’t stick to our own percentages or guardrails. We don’t do the annual check ins and changes. Financial nerds love this stuff and try their best to stick to the rules, however the general populace are not that way inclined.

In that regard, the best thing, other than hiring an independent financial adviser like myself to look at this for you, is to just pick a general direction or strategy and make amendments as you go. For example, not many people will continue to spend as much when the economy is shaky. It’s common sense. We don’t need a rule to tell us that. It’s just that it may not be an exact percentage or a scientific method behind it. Some flexibility is better than none though.

In terms of the strategies discussed today I am not much of a fan of the % rule or no spend inflation rule. To ignore your investment returns is a big negative for those strategies in my opinion. You could end up with more or less than you want towards the end of life and your spend isn’t optimized to live your best life in retirement. I am ok with fluctuating spend levels though so it’s just my thoughts.

Conversely I don’t particularly like the strategies that are just a percentage of investment returns either. This is the % of investment balance and guardrails strategies. Even though we wouldn’t mind variability in spend we don’t actually want too much. We don’t have big plans for increases in spend nor do we have a lot of room to cut from our spend either. These variable strategies don’t suit us personally.

That being said I quite like the hybrid strategies that use both investment balance and regular spend levels. This being the Vanguard and Yale strategies, with my personal preference towards something like the Yale strategy. There is some relationship with investment performance but not too much meaning variability of spend is not too high. And as there is some allocation towards investment performance, you are doing what you can to not over or underspend. It is basically the dollar plus inflation rule with guardrails.

I would also use the current CAPE ratio as part of my planning too. If it is high, in the vicinity of 30 plus, I would try to start off with a low withdrawal rate or maybe earn some income. Once I became more confident of money lasting, would I increase withdrawals.

This is not advice for you. I am just walking through my own thought processes for ourselves. The pros and cons that we are willing to tolerate will differ from me to you.

You don’t have to pick one strategy either. You can use bits and pieces from multiple strategies. For example, you can use a Bogleheads percentage but reduce the percentage withdrawal rate after years that have had poor investment returns. Or you could use the dollar plus inflation rule but add some guardrails should investment returns be poor.

Saving money is much easier than drawing down. As long as you are saving money, even an incorrect asset allocation can be saved by time and money. Regular additions. However, get the drawdown wrong and it can be hard to come back from that.

To calculate your own numbers for each of these strategies check out the retirement drawdown strategies calculator on the calculator page.

If you need help with your personal retirement planning, then get in touch today.

The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here