How Flexibility Can Give You $10,000/year In Retirement

The 4% rule by Jonathan Guyton is one of the most widely cited strategies for preserving wealth over a full retirement. It states that historically a balanced portfolio, rebalanced regularly, could have kept a 4% withdrawal rate, adjusted for inflation each year, throughout a 65-year-old’s hypothetical 30-year retirement. If you have $1,000,000 invested in a balanced portfolio of stocks and bonds, you should be able to start your retirement by withdrawing $40,000/year and adjust it up each year for inflation.1  

I also love this rule because of its simplicity and the rigorous data backing it. However, it fails to account for a retiree’s ability to lower withdrawals during bad market environments. Can you imagine taking the same amount from your portfolio in the depths of the 2008 financial crisis as you did the year prior? For some, that may be the case if the entire withdrawals are needed to cover basic necessities. But for most, they cut at least some of their expenses during market downturns.   

And that willingness to be flexible can allow you to spend more on average throughout your retirement.  

In a 2012 article in the Financial Planning Association Journal, the authors encouraged investors to choose between a 4% and 6% withdrawal rate based on their ability to cut withdrawals during bad years in the market.2

Jonathan Guyton followed up his famous 4% withdrawal rule by offering further research around this idea of flexibility. In an example, he considered a withdrawal rate of 5%, withdrawing $50,000/year out of $1,000,000. What happens if the portfolio falls to $800,000? That 5% withdrawal rate is now 6.25%. If the withdrawal rate ever goes over 6%, all you have to do is cut the withdrawal amount 10%, from $50,000 to $45,000. Each year you review it, and if the withdrawal rate is under 6%, no cut is necessary.3

The difference between a 5% withdrawal and 4% might not seem like much, but that increases your withdrawals 25%, or $10,000/year. For some, a little bit of flexibility might be well worth the tradeoff to spend $10,000/year more for most of retirement!  

Thank you for reading, 

 Alex 

This blog post is not advice. Please read disclaimers.

1 - Guyton, Jonathan, and William Klinger. “Decision Rules and Maximum Initial Withdrawal Rates.” Mar. 2006.

2 - Sr., Larry R. Frank, et al. “Spending Flexibility and Safe Withdrawal Rates.” Financial Planning Association, 1 Mar. 2012, www.financialplanningassociation.org/article/journal/MAR12-spending-flexibility-and-safe-withdrawal-rates.

3 - Szala, Ginger. “Forget the 4% RULE: Planner Explains His Flexible Retirement Withdrawal Strategy.” ThinkAdvisor, 29 July 2020, www.thinkadvisor.com/2020/07/29/planner-challenges-4-rule-with-flexible-retirement-withdrawal-strategy/.