Variable Withdrawal Rate Strategies for Retirees – Are They Good?

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Most retirees are familiar with fixed withdrawal rate retirement strategies. In the real world, however, the fixed withdrawal rate does not always work well because of the uncertainty in predicting the future. Thus, in recent years, the focus and attention of researchers and practitioners have shifted to variable withdrawal rate strategies for retirees.

Variable Withdrawal Rate Strategies – What Is It?

Variable withdrawal strategies, as the word suggests, involves varying withdrawal rates for retirees depending on a number of factors. The withdrawal amount, under this method, keeps adjusting based on the retiree’s retirement horizon, asset allocation, and most importantly, portfolio performance.

This strategy combines the best of 1/N withdrawal methods, constant-dollar, and constant-percentage to enable retirees to make the most of their portfolio. Moreover, by adjusting the withdrawals as per the portfolio performance, this method ensures that your portfolio never depletes prematurely.

Talking about how it works, this method deploys a variable (increasing) percentage for withdrawals. The withdrawal for each year is calculated by multiplying that year’s percentage by the portfolio balance at the time of withdrawal.

What’s The Need For Variable Withdrawal Rate Strategies For Retirees?

The 4% rule is the most popular and basic strategy retirees use to decide the withdrawal amount. This rule allows a relatively stable income in retirement. Moreover, it secures the withdrawal amount, and the ability of retirees to maintain that income for their lifetime. It is, however, not without risk.

If we consider systematic withdrawals, it exposes retirees to a sequence of return risks. It is basically the risk that retirees could witness sub-par returns early in retirement, which could significantly impact their savings.

Using a variable withdrawal rate could help retirees reduce the sequence of returns risk. In addition to offering protection from sequence risk, the variable withdrawal rate strategies for retirees also protects the portfolio from higher inflation.

Why Variable Withdrawal Rate Strategies Are Better

Christine Benz, director of personal finance and retirement planning at Morningstar, believes that variable withdrawal rate plans could prove more effective than static withdrawal plans.

To prove the point, Benz used many dynamic strategies and found that each gave a higher initial safe withdrawal rate than the fixed withdrawal method. It means that varying rate methods could allow retirees to get more from their investments in the early years.

Benz, in her research, noted that their “base case” system of fixed real withdrawals suggested a 3.8% starting withdrawal percentage for a portfolio with a 30-year horizon. On the other hand, the starting safe withdrawal rates under the variable method ranged from 4% to 5.3%.

Guardrails Strategy – Best Variable Withdrawal Rate Strategy

During the research, Benz tested many variable methods, but the “Guardrails Strategy” gave the best results. This strategy is the brainchild of computer scientist William Klinger and financial planner Jonathan Guyton.

Under this strategy, withdrawals should be increased when the market is rising and reduced when the market is going down. In other words, when the portfolio is performing well, this strategy allows retirees to raise the withdrawals by the inflation rate and by another 10% if the new withdrawal rate drops below 20% of the starting rate.

Similarly, retirees need to reduce the withdrawal rate by 10% whenever the new withdrawal rate, including inflation, is more than 20% of the initial rate.

Although the guardrails strategy has drawbacks, it offers the highest starting withdrawal rate. Also, this strategy gives the second-highest lifetime withdrawal rate (set withdrawal rate gives the highest lifetime withdrawal rate).

For instance, a portfolio with 50% equity and 50% bond and a 30-year horizon had a 5.3% average safe starting withdrawal rate (with a 90% probability of success) under the guardrails strategy. The success here means not running out of funds in 30 years.

Similarly, the research found that the starting safe withdrawal rate was higher for portfolios with more equity contribution. It was 5.6% for portfolios with 80% equity allocation, 5.9% for 90% equity allocation and 6.3% for all-equity portfolios, the research found.

Further, the method gave a lifetime withdrawal rate of 4.8% for a 50-50 portfolio and more than 6% for an all equity portfolio.


Here are the drawbacks of the variable withdrawal rate strategies:

  • It results in year-to-year cash-flow volatility.
  • This method leads to smaller final balances when compared to most other strategies. Thus, it is not appropriate for retires with a strong bequest motive.
  • It doesn’t allow retirees the benefit of the “set it and forget it” approach.

Final Words

All the factors that could impact the value of your portfolio will change over the course of your retirement, such as interest rates, taxes, investment returns, and inflation. So, adjusting your withdrawal to account for these changes will assist in balancing your spending to an amount that your portfolio can support.

A variable withdrawal rate could also give retirees peace of mind, and in turn, better investment performance as well. For instance, if the markets are down, the variable withdrawal method will allow you to make smaller withdrawals. This, in turn, will likely make you feel less nervous about running out of money.

This peace of mind will help you to stay calm enough to avoid the temptation to sell stocks when the markets are going down. Panic selling could hurt your portfolio performance in the long run.

However, as said above, variable withdrawal rate strategies for retirees are not without drawbacks. Retirees need to take into account these drawbacks before going for a variable withdrawal rate.