5 Withdrawal Strategies to Boost Retirement Income (And How High You Can Really Go)

A few months ago, Lisa M, a longtime listener in Chicago, sent me an email that I think

captures something many retirement savers wrestle with.

She wrote, Taylor, my husband and I have done everything right.

We saved, we invested, we kept our expenses under control.

But now that we're retired, we're really struggling to actually spend the money.

Every time we book a trip, write a big check, or think about helping our kids out, there's

this nagging voice asking, can we really afford to do this?

What if we overspend and run out?

Lisa and her husband are not alone.

In fact, there is no shortage of research showing that many retirees spend far less than

they likely could.

In one study, married retirees aged 65 and older, with at least $100,000 in financial

assets, withdrew just 2.1% of their savings per year on average.

Another study found that higher net worth retirees, who entered retirement with at least $500,000,

had spent less than 12% of their savings nearly 20 years later, and more than a third had

actually grown their wealth.

In other words, the dominant fear in retirement is running out of money, which is valid, but

for many people, the bigger risk may be under spending, and that's exactly what inspired

today's episode.

A recent research report examined nine different retirement withdrawal strategies, and the

finding suggests that many retirees may be able to start retirement with meaningfully

higher withdrawal rates than the traditional 4% rule implies.

So today, I'm going to break it all down.

I'm going to walk you through the five strategies that stood out exactly how they work, the

trade-offs involved, and what they teach us about building a smarter retirement income

plan.

I'm also sharing the three levers you can pull to safely push your starting withdrawal

rate to as high as 6.5%.

Welcome to another episode of the Stay Wealthy Retirement Show.

I'm your host Taylor Schulte, and every week, I tackle the most important financial topics

to help you stay wealthy in retirement, and now onto the episode.

Before we get into the five strategies for boosting retirement income, let me set the

stage with a little context and refresh all of our listeners on why this research matters

so much.

The traditional 4% rule, originally developed by financial planner Bill Bingen back in

the early 1990s, works like this.

You take 4% of your portfolio in year one of retirement, adjust that dollar amount for

inflation each year, and if history is any guide, your money should last for at least

30 years.

It's simple, it's easy to implement, and for a long time it was considered the gold standard

for retirees.

But here's what's interesting.

Even the creator of the rule, Bill Bingen himself, does not follow it as rigidly as many

people think.

In fact, Bingen has said that he personally uses closer to a 5% withdrawal rate for his

own portfolio.

But in many interviews, he's emphasized that the original research was built around

a worst-case scenario, someone retiring at the worst possible moment he could find in

modern market history, October of 1968.

As my good friend Michael Kitzes has pointed out in his research, the 4% rule is more likely

to quintuple your wealth than to deplete it.

So think about that for a second in the context of what we discussed earlier.

The research shows that many retirees are withdrawing around 2% of their savings.

The creator of the 4% rule uses closer to 5% for himself, and historically the rule is

more likely to leave you with far more money than what you started with.

While the under-spending problem in retirement is very much alive and real, the core limitation

of the 4% rule is that it does not adapt.

It assumes you withdraw the same inflation-adjusted amount every single year regardless of what

the market does.

Your portfolio drops by 30%, you take the same dollar amount.

Your portfolio doubles in value, you still take the same dollar amount.

But retirement rarely plays out that neatly.

It requires adaption.

As Amy are not from Morningstar recently highlighted in her recent research, the rigidity of this

approach is exactly why it produces a lower starting withdrawal rate.

The 4% rule has to be conservative because it does not have any built-in features to

help it course correct.

Now, I want to be clear here, I'm not saying the 4% rule is bad or that it should be avoided.

As I've said on the show before, it can be a great starting point for the retirement

income conversation.

But that's exactly what it is, a starting point.

And there's no shortage of research out there that shows what becomes possible when

you start to move beyond that starting point and introduce flexibility into the equation.

Now, to understand the withdrawal strategies that Morningstar tested, it helps to first

take a look at how they ran their analysis.

In short, they built a series of simulations using forward-looking return assumptions,

not back-tested, forward-looking return assumptions, for a portfolio made up of 40% stocks and

60% bonds.

They then ran 1,000 different hypothetical return patterns across a 30-year time period.

Think of it as testing how a retirement plan might hold up across 1,000 different possible

futures, some with strong markets, some with weak markets, and everything in between.

For each strategy they tested, the researchers asked a simple question, what's the highest

withdrawal rate someone could start with, and still end retirement with money left over

in at least 90% of those scenarios?

In other words, they weren't looking for a strategy that only works in perfect conditions.

They were looking for one that holds up most of the time, even when markets don't cooperate.

Using this framework, the traditional fixed withdrawal approach Morningstar's base case

produced a safe starting withdrawal rate of almost exactly 4%.

But five of the nine withdrawal strategies they tested meaningfully beat that number,

and they all have one thing in common.

Instead of locking spending into a fixed rule, they introduced some level of flexibility

into the retirement plan.

Let's go ahead and walk through each one.

The first strategy examined is commonly referred to as the constant percentage method,

and this method produced a starting safe withdrawal rate of 5.7%.

This approach is about as simple as it gets.

Instead of withdrawing the same fixed dollar amount each year based on your portfolio value

on day one of retirement, like the 4% rule, you simply withdraw the same percentage of

your portfolio balance every single year.

So if you use the 5.7% safe withdrawal rate from Morningstar's research, and your portfolio

goes worth $1 million in year one, you would withdraw $57,000.

If the portfolio drops to, let's say, $980,000 the next year, you withdraw 5.7% of that

new balance or about $55,900.

The benefit of this approach is that it's self-correcting.

When markets are down, your withdrawal also goes down and spending naturally adjusts.

When markets are up, your withdrawal amount goes up and you can spend more.

And because you're always withdrawing a percentage of the remaining balance, the portfolio can

never be fully depleted.

The trade-off with this method is that an income can swing quite a bit from year to year.

To soften those swings, which can be difficult for retirees who need consistent income,

the researchers applied a spending floor so that withdrawals in any year don't drop

below 90% of the initial withdrawal amount.

And with that floor, the portfolio still ended with a positive balance and at least 90%

of the 1,000 scenarios they tested over the 30-year time period.

One final note before we move on to number two, the constant percentage method does not

include an inflation adjustment.

Your spending only goes up when your portfolio goes up, and if a good year in the market

is followed by a weaker one, that bump in spending may only be temporary.

So keep that in mind, if this is the methodology that you or your advisor ultimately consider

implementing.

Okay, the second withdrawal strategy studied is known as the endowment method, which also

happened to support a 5.7% starting withdrawal rate under the same parameters.

As the name suggests, this approach borrows from how university endowments manage their

spending.

But instead of applying the 5.7% withdrawal rate to the portfolio's current value each

year, like the constant percentage method, this strategy bases withdrawals on an average

portfolio value over time, which is intended to help smooth out those year-to-year swings

and spending.

In the research, Amy and her team used a 10-year rolling average in approach that was

recommended by the well-known author, consultant, and academic Charlie Ellis.

But here's where it gets a little bit more complex and does require some ongoing maintenance.

Early in retirement, when there isn't yet a long history of portfolio values to average

out, withdrawals are based on the prior years ending balance.

Each year after that, another year of data gets added to the calculation, slowly building

the average over time.

By year 10, withdrawals are calculated using the average portfolio value from the prior

10 years.

The longer-term result is a much smoother spending path, largely because withdrawals

are not tied entirely to whatever the portfolio happened to do in the most recent year.

That said, this approach still shares some of the same limitations as the constant percentage

method.

Currently, income variability and no automatic inflation adjustment.

However, the averaging effect does help soften spending cuts during those market downturns.

Just like the constant percentage method, the researchers applied the same 90% spending

floor, preventing withdrawals from falling below 90% of the previous year's amount.

Moving on to the third strategy, which is the one I was personally most interested to

see show up in this study, because it aligns closely with what we use with our clients.

This is the guardrails method, which was originally developed by financial planner Jonathan

Geiten and computer scientist William Klinger.

Now, I've talked about the Geiten Klinger guardrails a number of times on the show before,

but for those who are new or need a refresher, let me briefly summarize how it works, and

then I'll share what Amy's research found.

The approach was first introduced in a paper Geiten published in 2004, and then later refined

with Klinger in 2006.

At its core, it was designed around four primary goals most retirees care about.

Number one, maximizing income, especially early in retirement.

Number two, avoiding the risk of running out of money.

Number three, limiting disruptive income changes, and number four, maintaining purchasing power

by adjusting for inflation.

To implement this strategy, you begin by setting an initial withdrawal percentage based

on your portfolio allocation and time horizon.

Each year, withdrawals can increase with inflation if certain rules are met, but the guardrail

serve as boundaries, triggering pay raises when the portfolio performs well, and pay cuts

when it doesn't.

Here's how those boundaries work.

If your portfolio performs well, and your withdrawal rate falls more than 20% below your starting

withdrawal rate, the prosperity rule triggers, and you receive a 10% pay raise from your

portfolio.

In other words, your investments have grown enough relative to what you're withdrawing

that the system signals it's safe to spend a little more.

On the flip side, if markets decline, and your withdrawal rate rises more than 20% above

your starting rate, the capital preservation rule triggers, and you take a 10% pay cut.

Not a drastic one, just enough to keep the plan sustainable.

Let me put some numbers to this, because I know it can be a little confusing.

Propose you start retirement with $1 million, and you determine that a 5.2% starting

withdrawal rate is appropriate based on Morningstar's research.

In year 1, you would withdraw $52,000, that's 5.2%, multiplied by $1 million.

Now, if your portfolio performs well, and it grows to, let's say, $1.3 million, that

same $52,000 withdrawal would now represent about 4% of the portfolio, more than 20% below

your starting withdrawal rate of 5.2%.

This would trigger the prosperity rule, and increase your withdrawal by 10%, bringing it

up to $57,200.

Now, let's flip it around.

If markets decline, and your $1 million portfolio falls to, let's say, $800,000, that same $52,000

withdrawal would equal roughly 6.5% of the portfolio balance, more than 20% above your

starting withdrawal rate.

This would trigger the capital preservation rule, reducing the withdrawal by 10% to about

$46,800.

It's a meaningful adjustment, but it's important to point out that you're still withdrawing

more than the traditional 4% rule, and more importantly, you've helped protect the long-term

sustainability of your plan.

The beauty of this approach is that it effectively creates a spending range, a set of guardrails

your withdrawals stay within, and to really simplify it each year, only one of four things

can happen.

First, if the previous year's returns were negative, you skipped the inflation adjustment

and just keep spending the same amount.

Second, if returns were positive, and the withdrawal rate is still within the guardrails,

you adjust for inflation.

Third, if the withdrawal rate drifts too high, you take a modest cut.

And potential outcome number 4, if the withdrawal rate drifts too low, you get that pay raise.

As Amy confirms in her research, this approach supports a 5.2% starting safe withdrawal rate

meaningfully higher than the traditional 4% rule.

And stick with me here, because later in this episode, I'll explain how adjusting three

key levers can push that number even higher, giving you even more control over your spending.

But ultimately, what I love about the guardrails method and why we use it with our clients

is that it gives retirees that confidence to spend more when markets cooperate while

automatically dialing things back when they don't.

It's disciplined, it's rules based, and it removes much of the emotional decision making

that tends to trip people up.

And here's what really stood out in the research.

The guardrails approach didn't just allow for a higher starting withdrawal rate.

For someone retiring with a $1 million portfolio, it produced about $1.36 million in total

lifetime spending over 30 years, meaningfully more than the traditional fixed approach,

while the median ending portfolio balance was still around $700,000.

In other words, retirees were able to spend more along the way while still finishing

retirement with significant assets remaining in many scenarios.

That's the benefit of flexibility, spending rises when markets cooperate, and guides

you to pull back slightly when they don't.

And if your goal is to die with as close to zero as possible, the results also highlight

one of the downsides, leaving more money behind than intended.

Okay, let's move on to the fourth withdrawal strategy, which builds directly on the guardrails

concept.

Amy calls this one Probability-Based Guardrails, and in the study, it supported a 5.1% starting

with draw rate slightly lower than the standard guardrails approach.

Here's how it works.

Instead of relying only on the withdrawal percentages to trigger raises or cuts, this method

takes things a step further by recalculating the probability of success every single year.

In other words, you're essentially rerunning your retirement plan annually to see how

sustainable it still looks based on updated market performance.

If strong markets push the probability of success up to 95% or higher, spending increases

by 10%.

But if a rough stretch drags the probability down to 75% or lower, spending gets reduced

by 10%.

To keep spending from drifting too high after a long run of strong markets, the researchers

also placed a cap on withdrawals at 120% of the initial inflation-adjusted amount.

And the results here were pretty striking.

As Amy highlights, this method produced the highest total lifetime spending of any strategy

tested, about $1.55 million over the 30-year time period on a starting portfolio balance

of just $1 million.

But there's a trade-off.

It also left the smallest median ending portfolio balance at just $230,000.

So if leaving a significant legacy is an important goal, this approach may not be the best fit.

Okay, before I explain how retirees can push their withdrawal rate even higher than what

we've discussed so far, let's quickly look at the fifth and final strategy, the Vanguard

Floor and Sealing Method.

This is essentially another variation of the guardrail's concept, and just like the

previous strategy, it supports a 5.1% starting withdrawal rate.

The process starts the same way as the others.

You set an initial withdrawal percentage, and then adjust it each year for inflation.

But then a second step kicks in, which changes things slightly.

For a new withdrawal amount, must stay within a tight band relative to the prior years

withdrawal.

Specifically, it can increase by no more than 5%, or decrease by no more than 2.5%.

The goal here is to avoid two common retirement mistakes, number one, spending too aggressively

after a market decline, or number two, becoming overly conservative after a long stretch of

strong returns.

And here's how it works in practice.

In the research example, a retiree named Elaine begins by withdrawing 5.1% of her $1

million portfolio, or $51,000.

At the start of year two, that amount first gets adjusted for inflation.

So if inflation was 2.5%, her inflation adjusted withdrawal would be $52,275.

From there, the guardrails are then applied.

The ceiling allows the withdrawal to increase by no more than 5%, which would bring the

maximum to about $55,000.

The floor allows it to decrease by no more than 2.5%, which would set the minimum to slightly

more than $50,000.

Now suppose Elaine's portfolio finished the year at $1,50,000, while a 5.1% withdrawal

from that balance would equal about $53,500.

And because that number successfully falls between the floor and the ceiling, it becomes

the withdrawal amount for the following year.

As noted in the research, this approach fine tunes withdrawals, so retirees don't spend

too aggressively when markets are down, while still allowing spending to rise modestly

when markets cooperate.

In essence, it's a more tightly controlled version of the guardrails framework.

And due to its more conservative design, it finished with a higher median ending balance,

for $880,000, versus $700,000 for the traditional guardrails method.

So those are the five withdrawal strategies that stood out in Amy's research.

And as we wrap up, I want to highlight three key takeaways for retirement savers, and

then we'll quickly look at how you can safely push starting withdrawal rates to as high

as 6.5%.

The first takeaway is that flexibility and the willingness to adjust spending is the price

of admission for higher withdrawal rates.

Every strategy we discuss today requires some potential variability in year-to-year income.

If you want or need the comfort of a perfectly consistent paycheck and retirement, you can

absolutely have that, but you'll likely start closer to the traditional 4% rule and use

a more rigid withdrawal method.

The second takeaway, and this is something I talk about often here on the show, retirement

spending is as much psychological as it is mathematical.

Many of the clients we work with have more than enough money to thrive in retirement,

but many still struggle to spend it.

It doesn't matter if they have a $2 million nest egg or a $15 million nest egg, many

still worry that a couple of bad years in the market and or a costly, unknown event could

derail everything.

As a result of this very valid fear, they skip the trip, postpone the renovation, they

say no to experiences with their grandkids, and they're not alone.

According to the Alliance for Lifetime Income, 46% of retirees say spending their savings

creates anxiety, and 41% say they don't know how to properly stage withdrawals from their

accounts leading to under-spending and retirement.

What's fascinating is that the academic research from David Blanchett and Michael Fink shows

retirees spend about 80% of the income they receive from guaranteed sources like social

security or pensions, but when it comes to their portfolio assets, 401Ks and IRAs

and taxable brokerage accounts, they spend less than half.

Same dollars, same purchasing power, but money that arrives as a paycheck tends to get

spent while money sitting in investment accounts often feels untouchable.

That's why rules-based spending frameworks are so powerful, when you have clear guardrails

that tell you when you can safely spend more and when to pull back, you're essentially

turning your portfolio into a paycheck, and as I've shared on the show for years, building

flexibility into your plan doesn't just improve and protect it, it can also give you more

confidence to actually spend and enjoy those early active years of retirement.

Okay, the third and final takeaway is that the projected ending portfolio balance of

the strategy you ultimately choose is something worth paying close attention to.

As the research we discussed today illustrates, the strategies that maximize spending during

retirement typically leave the least amount of money behind.

For example, the probability-based guardrails approach produced the highest lifetime spending

on a $1 million portfolio, about 1.55 million spent over retirement, but it ended with a

median balance of just $230,000.

The traditional fixed withdrawal approach did the opposite.

It left behind a median balance of 1.42 million, but retirees using that method only spent

about 1.17 million during retirement.

In other words, many retirees following a traditional withdrawal strategy may ultimately

leave behind more money than they actually used, and this pattern shows up in broader research

as well.

A Federal Reserve study found that retirees, on average, die with nearly twice as much

savings as they had when they retired.

That's slightly more, nearly double.

So if you've saved diligently, but now feel hesitant to spend your nest egg, I want you

to hear this clearly.

The math, the research, and decades of market history all suggest that you can likely afford

to spend a little more than you think, especially when a flexible, rules-based plan is guiding

your decisions.

Which brings me to one final point.

For longtime listeners, you know that a guardrails-based spending approach is a core piece

of our total retirement system.

The four-part framework might seem and I developed to help clients make tax-smart decisions

with their money and thrive in retirement.

When I read Amy's research, it was encouraging to see Morningstar's data reinforce the same

principle.

Flexible spending strategies can support higher withdrawal rates, generate more lifetime

income, and still maintain discipline.

These methods work well largely because they are self-correcting.

They allow spending to rise when your plan is ahead of schedule and signal modest pullbacks

when it isn't.

No panic, no guesswork, just a clear set of rules.

And when you combine that with thoughtful tax planning, diversified investments, a war

chest of cash and bonds, and a clear investment policy statement, you get a retirement plan designed,

not just to survive market volatility and the eventual surprises, but to navigate it with

confidence.

That's really what the total retirement system is about.

Expenses, income, estate, insurance, and investments all working together so every decision reinforces

the next.

If today's episode has you thinking about your own retirement plan, whether your goal

is to reduce taxes, maximize spending, leave a meaningful legacy, invest smarter, or

strike a balance between all the above, that's exactly the kind of work my team and I do

every single day.

You can learn more about our process and schedule a free retirement strategy session by following

the link in the episode description right there in your podcast app.

You can also visit usaywealthy.com and click on that big magenta color button that says

work with me to watch a short video of me explaining our process in more detail.

Alright, one final bonus for those of you who stuck with me here all the way to the end.

Earlier in the episode, I mentioned that some retirees can actually start with withdrawal

rates even higher than the ones in Morningstar study and I promise I'd explain how.

So let's quickly take a look at what actually drives those numbers.

In the original guardrails research, which I've included in today's show notes, there

are essentially three primary drivers that determine how high that starting withdrawal

rate can be.

The first driver is your retirement time horizon.

In other words, how long the portfolio needs to support your withdrawals.

In short, the longer the time horizon, the more conservative the starting withdrawal rate

generally needs to be.

For example, the guardrails research states that someone planning for a 30 year retirement

can begin with a higher starting withdrawal rate than someone planning for 40 years or

more.

That extra decade matters because the longer your money needs to last, the greater the

impact of things like inflation, market volatility, and sequence of returns risk.

So a longer retirement time horizon usually means starting a little more cautiously.

The second driver is your portfolio's asset allocation.

More specifically, how much of the portfolio is allocated to global stocks.

In general, multi-asset class portfolios with higher stock allocations have historically

supported higher starting withdrawal rates.

A portfolio that's, let's say, 60% stocks has historically supported a higher withdrawal

rate than a portfolio with 40% stocks, like the one used in Morningstar's research.

And the reason is fairly intuitive.

Ritikes have historically provided more long-term growth than bonds, which helps to replenish

withdrawals and keep up with inflation over multi-decade retirements.

But of course, that growth comes with more volatility along the way, which means retirees

need to be comfortable riding through some of the markets ups and downs.

And that brings us to the third driver, which is what the researchers call the confidence

standard.

In simple terms, this is the probability of success you want your plan to have.

For example, the research looks at confidence standards like 99%, 95%, and 90% probability

of success.

That simply means the percentage of simulated retirement scenarios where the portfolio

still had a positive balance at the end of the withdrawal period.

The more conservative you want the plan to be, say targeting a 99% success rate, the lower

the starting withdrawal rate will generally need to be.

But if you're comfortable with a 95% or even 90% probability of success, the math allows

for higher starting withdrawals.

Now, it's important to remember that these guardrail strategies are not static.

They include built-in adjustments like the capital preservation rule and the prosperity

rule that automatically reduce spending when market struggle and increase spending when

things go well.

Those rules are what allow the system to self-correct over time.

And when you combine those decision rules with a growth-oriented portfolio, a defined

time horizon, and a chosen confidence standard, the research shows that starting safe withdrawal

rates can be as high as 6.5%.

Now, that doesn't mean everyone should start there, but it does highlight an important

point.

The 4% rule, as well as the numbers in the Morningstar study, are not fixed ceilings.

They're simply starting reference points.

Ultimately, determines your withdrawal rate isn't a single rule.

It's the combination of your goals, your portfolio, and your willingness to be flexible

along the way.

And when those pieces work together inside a thoughtful framework, retirees often discover

they have more spending power than they realized.

Which at the end of the day is really what all this research is about, helping you spend

your money with confidence, clarity, and purpose.

Thank you, as always, for listening, and once again, to view Amy's research and the

additional resources supporting today's episode, just head over to UStayWalty.com-4-274.

This podcast is for informational and entertainment purposes only, and should not be relied upon

as a basis for investment decisions.

This podcast is not engaged in rendering legal, financial, or other professional services.