How Variable Withdrawals Improve Retirement Outcomes

How Variable Withdrawals Improve Retirement Outcomes

How Variable Withdrawals Improve Retirement Outcomes by Joe Tomlinson

Variable withdrawal strategies for retirement spending are receiving more attention from researchers and practitioners. Unlike fixed strategies, where the withdrawal plan is set at the beginning of retirement, variable strategies adjust spending over the course of retirement to reflect investment experience.

Optimal asset allocations for variable withdrawal strategies are quite different from the research findings and rules of thumb based on fixed strategies. Indeed, the implications go beyond asset allocation and show, for example, that equity glide paths in retirement are relatively unimportant.

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Variable Withdrawals

Asset allocation in practice

Perhaps the best known rule of thumb in financial planning is the “100 minus age” stock allocation recommendation where a 65-year-old would hold a 35/65 stock/bond mix and the stock allocation would be reduced over the course of retirement. Given longer lifespans, some have argued that the 100 should be replaced by 110 or 120, which would raise the initial stock allocation as high as 55%. Charles Schwab recommends a 60% stock allocation from ages 60 to 69, 40% for ages 70 to 79 and 20% for ages over 80. My test of a Vanguard calculator based on a moderate-risk appetite showed that it recommends a 40% stock allocation at the beginning of retirement, and the Vanguard Target Retirement Income Fund (VTINX) uses a 30% stock allocation.


Research findings have favored somewhat higher stock allocations than those. Bill Bengen’s classic 1994 article that introduced the 4% rule also contained an asset allocation recommendation. He didn’t recommend a specific stock/bond mix, but demonstrated that stock allocations in the 50% to 75% range worked best to eliminate plan failures with a 4% inflation-adjusted withdrawal rate. There have been lots of articles since, some by Bengen, that have refined his original research, and, in recent years, we have seen articles challenging the safety of the 4% rule in a lower return environment. There has also been much research, discussion and debate about the allocation to equities over the course of retirement – the equity-glide path – and whether it should decrease, increase or remain level. Another topic that has received attention is the extent to which asset allocations should reflect market valuation measures such as the CAPE ratio. All told, the range of recommended retirement stock allocations has been 30% to 75%.

With this discussion as a backdrop, I’ll introduce variable withdrawal strategies and then develop asset allocation modeling to demonstrate how the optimal strategies with variable withdrawals differ significantly from the 30% to 75% range.

Introducing variable withdrawals

Variable withdrawal methods share the common characteristic that withdrawals adjust each year during retirement to reflect underlying investment performance, whereas, with the 4% rule and other fixed methods, the withdrawals are mapped out at the start of retirement. With fixed withdrawals, bad investment experience or longer-than-expected retirements can result in savings being depleted (plan failure), while better-than-expected investment experience will flow through to larger bequests. Although the 4% rule has been popular with researchers, practitioners recognize that good planning cannot ignore what is happening with the investment portfolio; spending adjustments will need to be made during retirement. One might determine these adjustments informally or apply a more disciplined variable withdrawal strategy.

I’ll develop a hypothetical client example to demonstrate how outcomes using the 4% rule differ from those based on a variable withdrawal strategy. Then I’ll turn to optimizing the asset allocation to support the variable strategy. This modeling will be based on a 65-year-old retired female with a remaining life expectancy of 25 years and $1 million in savings that she can dedicate to generating retirement income. Her basic living expenses are $50,000 per year, increasing with inflation, and she will receive an inflation-adjusted $30,000 annually from Social Security. She will utilize withdrawals from savings to cover the gap between basic living expenses and guaranteed lifetime income and take additional withdrawals for discretionary spending. Her main goal is to generate sustainable retirement income; leaving a bequest is of secondary importance. The analysis will be pre-tax.

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