Key Takeaways
- Rethinking Retirement Withdrawal Rates.
- Why the 4 % Rule Became a Household Name.
- Rethinking Retirement Income: The Uneven Shape of Spending.
- The Retirement Smile: Go-Go, Slow-Go, No-Go.
Overspending vs. Underspending: It’s about BOTH. - Risk-Based Guardrails: A Better Approach.
- How Can You Properly Stress Test Your Retirement Plan?
- The Social Security Trade-Off.
- Don’t Forget the Real-World Friction from Taxes and Fees.
- Key ideas to keep in mind.
- Conclusion: What is a safe withdrawal rate in retirement for you?
Rethinking Retirement Withdrawal Rates
When we first talk with pre-retirees about what keeps them up at night, one answer comes up more than most: “How much can I safely spend from my portfolio each year?” After all, what we are really seeking is paycheck replacement. We want to be able to shift from having our employer pay us an amount each month to having our combined investments start paying us a comparable amount, and do that for many years, through life’s ups and downs. For decades, the 4% rule offered a comforting answer. It was simple, catchy, and backed by research. But like many “rules of thumb,” it works best on paper and much less so in real life.
In the real world, retirement spending isn’t a steady line, it’s a series of hills and valleys. Social Security starts can be later for some, medical costs spike for others, and spending in your 60s rarely looks the same as in your 80s.
We have always felt that one of our responsibilities is to help people better navigate reality. Sometimes that requires a fresh approach. When it comes to retirement income planning, a more real-world approach is one that blends behavioral insights, flexible math, and real-world variability. Instead of anchoring to a static withdrawal rate, we build plans for you that adjust dynamically over time, much like a baseball coach who tweaks a game strategy inning by inning based on the conditions on the field.
This blog post explores the key takeaways we learned over the years. We’ll cover why the 4% rule is both brilliant and flawed, how real retirees actually do spend money (hint: it’s not flat), and how tools can use risk-based “guardrails” to keep spending on track without overreacting to every market hiccup. If you are getting close to or in retirement, then understanding these evolving strategies might just change how you think about financial freedom.
Why the 4 % Rule Became a Household Name
All retirement income planning starts with the same question: How much can you safely withdraw from your retirement portfolio each year without running out of money? In 1994, financial planner William Bengen, tackled this problem with a thoughtful analysis. He looked at historical market returns going back to 1926 and tested hundreds of retirement scenarios. His answer, and later echoed by the Trinity Study, was simple and powerful: If you withdraw 4% of your portfolio in your first year of retirement and adjust that amount each year for inflation, you should be able to make your money last 30 years, even during bad markets.
For many people, this became gospel. The “4% Rule” spread throughout our industry. It was easy to articulate and easy to remember, even if you didn’t know all the variables behind it. Not only was it reassuring, but it also felt scientific. Additionally, it gave retirees a clear number to plan around in a world filled with financial uncertainty.
But like most things in life, the devil is in the details. The 4% rule was designed for a very specific set of assumptions—no other income sources, constant inflation-adjusted spending, and a 30-year retirement. Real life rarely follows that script. Most people have pensions, Social Security, changing expenses, and retirement timelines that don’t match the textbook. Specific behavior tendencies were also never addressed. Yet the 4% rule is still seen in many articles and advisor meetings today as if it were a universal law.
There is an old saying in our business that “All models are wrong, but some are useful”. The 4% rule is useful—but only if you treat it as a starting point, not a final answer.
Pros:
- It’s simple and easy to understand.
- It highlights the danger of sequence-of-return risk, especially big losses early in retirement.
- It can help you understand the need for restraint in withdrawal planning.
Cons:
- It assumes level spending for 30 years, something few retirees do.
- It ignores taxes, Social Security timing, and personal spending patterns.
- It creates a false sense of security or fear depending on market conditions.
Rethinking Retirement Income: The Uneven Shape of Spending
Retirement income doesn’t arrive in one tidy stream. It’s more like a series of waves, some stronger than others. Early on, many retirees rely heavily on their investment portfolios to fund spending. That’s because key income sources like Social Security or pensions may not kick in until several years after retirement begins. For those who delay Social Security to age 70—a strategy that boosts benefits by about 8% per year—they’re essentially building a stronger income stream later in exchange for needing to draw more from their portfolio in the early years.
If you were to chart this visually, your portfolio withdrawals start out larger, covering most of your expenses, then shrink as Social Security and other income layers begin to kick in. It would look like a door stop wedge: higher on one side and then gradually getting smaller to a certain point. By the time you reach your mid-70s or beyond, many retirees may be leaning more on guaranteed income and drawing much less from their portfolios.
The Retirement Smile: Go-Go, Slow-Go, No-Go
Retirement isn’t just one long phase—it’s made up of seasons. This idea is often described as the “Go-Go, Slow-Go, No-Go” years. In the early years, most retirees are active, healthy, and eager to enjoy the freedom they’ve spent decades working toward. Travel, hobbies, and new experiences tend to dominate this period. Because of this, spending tends to be at its peak. This is the “Go-Go” phase, and it often lasts through a person’s 60s and into their mid to late 70s.
As time goes on, the energy to travel and explore naturally fades. Health concerns may begin to arise, and people tend to settle into more routine lifestyles. Dining out less, traveling less, and spending more time at home often means a gradual reduction in discretionary expenses. This middle stage is the “Slow-Go” phase, when spending eases off—not because of financial constraints, but because of changing lifestyles and preferences.
Eventually, the “No-Go” years arrive. These are typically the later years of retirement, when health limitations or mobility issues reduce activity even more. While healthcare costs may rise, overall discretionary spending often stays lower. People may downsize, drive less, or stop traveling altogether. In many cases, spending during this phase is lower than in earlier years, although long-term care needs and more consistent outside help can sometimes create spending spikes.
If you were to graph spending across these phases—starting with high spending in the early years, dipping in the middle, and possibly rising again toward the end—you’d see a curve that resembles a smile. It starts high on the left, dips in the center, and curves upward slightly on the right. This “retirement smile” captures the natural rhythm of aging and lifestyle change.
Recognizing this pattern allows retirees to spend more confidently in the early years, knowing that their expenses may actually decrease as they age, at least until health-related costs potentially rise later. Our Retirement Income Planning tools are designed to incorporate this reality, helping you match their spending plans to how people live, rather than to a flat and unrealistic average.
Overspending vs. Underspending: It’s about BOTH
What if you could have spent more on retirement, but didn’t? What if your fear of running out led you to live more cautiously than necessary, missing out on some experiences, charitable plans, or the comfort that you could have afforded? You don’t want a zero-bank account before you leave this earth, but on the other hand, you don’t want to enter the last years of your life with regret that you could have done more when you were able.
On the one hand you have the risk of overspending, draining your portfolio too quickly and jeopardizing your financial security. On the other hand, there is the risk of underspending, being too cautious and leaving potential joy on the table. Most financial plans only show one side: the probability of success. That metric tells you whether you’ll avoid running out of money, but it doesn’t say whether you’re using your money well along the way.
The Porter Investments approach includes both sides. Our tools continuously monitor the probability that you could be spending too much or too little and adjust the plan accordingly. This creates a more balanced, real-world way to think about retirement—not as a tightrope walk over disaster, but as a wide path with guardrails on both sides.
- Helps you better understand both financial survival and lifestyle satisfaction
- Encourages right-sized spending based on real conditions, not just fear
- Promotes smarter adjustments over time using actual probabilities
- It does require regular monitoring and good data to stay on track
Risk-Based Guardrails: A Better Approach
Instead of watching a raw withdrawal percentage, our tools continuously recalculate the probability of falling into the overspend or underspend zones, incorporating:
- Updated portfolio value and asset mix.
- Remaining life expectancy (plan length shrinks yearly).
- Future Social Security or pension start dates.
- Current inflation and fee assumptions.
When the probability of overspending breaches a preset threshold, say 15 %, spending is trimmed modestly. If underspend risk breaches another threshold, say 70 %, spending gets a raise. The limits of these “spending bands” widen or narrow with your age, as your actual lifestyle needs develop, and the sustaining capability of your portfolio is continually assessed.
How Can You Properly Stress Test Your Retirement Plan?
The Social Security Trade-Off
One of the most powerful, but often misunderstood, levers in retirement planning is when to claim Social Security. Many people are tempted to claim as early as possible, usually at age 62, simply because they don’t want to “miss out.” However, what’s often missed in that rush is the math: for every year you delay claiming between your full retirement age (around 66 or 67) and age 70, your benefit increases by about 8% per year. That’s a guaranteed, inflation-adjusted return, something almost no investment offers with that level of certainty.
Delaying Social Security can dramatically increase your lifetime income, especially if you live into your 80s or 90s. It also provides a larger survivor benefit for a spouse, which can be especially valuable in married households. From a purely financial standpoint, delaying often makes sense.
But here’s the trade-off: you have to make up that income from somewhere in the meantime. And that “somewhere” is usually your investment portfolio. That means in the early years of retirement, when you’re still active and spending more, you’re withdrawing more from your portfolio than you would be if you had started Social Security earlier. This can expose your savings to a more sequence-of-return risk, where poor market performance early in retirement causes long-term damage.
It’s like waiting out a slow-moving storm. If you stay indoors longer (delay Social Security), the sunshine on the other side (higher guaranteed income) is brighter and longer lasting. But during the wait, you need a strong roof (portfolio withdrawals) to protect you. If a financial storm like a market crash hits during that waiting period, your savings have to absorb the impact without the cushion of Social Security income.
Tools should help you evaluate this trade-off dynamically. They should not just look at lifetime benefit estimates, but also incorporate the effect of early portfolio withdrawals, inflation, market volatility, and even the changing shape of a retiree’s spending needs. It should then adjust the risk and spending guardrails accordingly. For example, delaying Social Security may result in tighter downside thresholds in the early years of retirement to protect against overspending when portfolio drawdowns are at their highest.
In short, the Social Security decision isn’t just about maximizing one number—it’s about balancing income timing with market risk and personal lifestyle goals. With the right planning, you may be able to delay benefits to gain a stronger financial foundation later, without taking on more risk than you can handle early on. We have posted a detailed article on considerations for claiming Social Security.
Don’t Forget the Real-World Friction from Taxes and Fees
Retirement planning is often presented in clean, round numbers—like a 4% withdrawal rate or a $100,000 annual income target. But in reality, money in retirement doesn’t move through a frictionless system. Taxes, investment fees, and healthcare costs can all erode what you can actually spend. That’s why the gap between “gross” and “net” retirement income can be surprisingly wide.
Take taxes, for example. If your retirement income comes from traditional IRAs or 401(k)s, every dollar you withdraw is taxable as ordinary income. So, if you take out $100,000 to fund your lifestyle, you may only keep $75,000 or $80,000 after taxes, depending on your tax bracket. Investment management fees and Medicare premiums can further reduce your spending power. Yet many withdrawal strategies ignore these “real-world” drags entirely.
You should make sure that your analysis considers actual tax models – federal, state, and even the impact of things like required minimum distributions (RMDs) or Roth conversions. Rather than planning with pre-tax guesses, you’re working with a closer approximation of what will hit your bank account. This helps you have a more accurate, usable picture of what you can afford.
It’s like driving with your GPS set to “arrival time in ideal traffic.” It’s nice in theory, but it doesn’t help much if you hit construction. Taxes and fees are the construction zones of retirement. They slow you down, but if you know where they are, you can reroute and keep moving. Ignoring them can leave you short of your destination. Factoring them in makes the plan far more resilient and realistic, helping to make confident decisions with eyes wide open.
We have found that much safe-withdrawal research uses pre-tax dollars. Maybe their attitude is that everyone’s tax situation is different, so we should adjust accordingly when deciding on a plan. Our tools provide realistic tax modules, recognizing that a $100,000 IRA draw might net only $75,000 spendable cash depending on brackets.
Furthermore, Morningstar’s 2024 update concluded that incorporating today’s bond yields and lower equity valuations supports a base withdrawal closer to 3.8 % for 30-year horizons; again, a moving target.
Key ideas to keep in mind:
- The line created from Portfolio withdrawals each year may resemble a doorstop wedge.
- The line created from your spending levels each year may resemble a smile.
- It’s about balance, not statistics. Too much overspending does make you insolvent, but too much underspending makes you regretful. Continual balance and adjustment along the way help to minimize both.
- Use stress tests the way a coach uses a scrimmage; you practice bad markets and see your potential exposure before they happen.
- Re-visit Social Security timing annually; what was smart last season may need a mid-game audible
Conclusion: What is a safe withdrawal rate in retirement for you?
We must all accept the fact that there is no specific withdrawal rate percentage that we can apply every year to our portfolio, regardless of what happens in the markets and in life, that will ensure that we will never run out of money. If you made it close to retirement, you probably know deep down that some things in life cannot be reduced to a simple number, no matter how we would like it to be that way. However, a 3-4% withdrawal rate as a STARTING POINT may be a good place to start, and then continually adjust from there.
Remember, investing is personal. What worked for your neighbor or coworker does not mean it is right for you. Before making any changes, preparation and approaching it with realistic expectations is the key. Spend a few minutes with us to see if we are a good fit for each other.
The Porter Investments Strategies were developed by our President and founder, Bob Porter. His prior work at Fidelity Investments allowed him the opportunity to advise and study a diverse group of investors.
