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Retirement

A guide to retirement withdrawal strategies

Find the optimal retirement withdrawal strategy to maximize spending and savings.
10 minute read   •   March 07, 2025
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How much can you spend in retirement?

Most people spend years saving for retirement. Then, when the time comes to begin spending their savings, they have no strategy in place.

Many studies—including our own research1—have shown that successful retired investors often don't spend much of their retirement savings, and their money continues to grow. It's not a terrible problem to have, but it could mean these investors are being overly frugal in retirement because they're not sure how much they can "safely" spend.

See other behavioral factors that can affect retirement spending

It's crucial to have a strategy for accumulating retirement assets. Equally important is a strategy to withdraw from your retirement savings. Your withdrawal strategy should accomplish 2 often-competing goals:

  1. Having enough money to support your desired lifestyle.
  2. Ensuring there's enough left for the future, including any money you plan to leave to heirs.

There are several ways to successfully withdraw from your retirement savings. Our advisors can help you determine which approach might work best for you.

Traditional retirement withdrawal strategies

The dollar-plus-inflation strategy calls for you to spend a percentage of your portfolio the first year and adjust that amount in subsequent years based on inflation.

Here are some things to know about this strategy:

  • The "4% rule" is a popular example of the dollar-plus-inflation strategy. Here's how it works. You withdraw 4% of your portfolio in your first year of retirement. Then, in each subsequent year, the amount you withdraw increases with the rate of inflation. If you don't expect your expenses to change much throughout retirement, this strategy can help ensure you'll be able to cover your yearly costs for as long as the portfolio lasts (goal 1).
  • It ignores market conditions, so you could end up running out of money (in down markets) or spending much less than you can afford (in up markets).
  • It could be best for you if you plan to maintain a steady level of spending from year to year, adjusted for inflation.

The percentage-of-portfolio strategy calls for you to spend a fixed percentage of your portfolio every year. This strategy:

  • Gives you confidence of achieving goal 2—not running out of money.
  • Results in yearly spending amounts that are completely market-driven and could fall short of what you need to live. Favorable market conditions could also push you into taking out more than you need.
  • Could make sense for you if your main concern is ensuring you don't deplete your portfolio and you can adapt your budget to a wide range of spending levels.

As the name implies, a fixed-dollar withdrawal strategy involves taking the same amount of money out of your retirement account every year for a set time, then reassessing. It can:

  • Provide a predictable income stream, which can be helpful for budgeting and planning. You'll know exactly how much money you'll be withdrawing each year.
  • Add a level of simplicity. Fixed-dollar withdrawals are relatively easy to manage, and you don't need to constantly adjust your withdrawal amounts.
  • Leave you exposed to the risks of inflation.

Once you figure out how much to withdraw from your portfolio, the next step is to determine which assets to withdraw from. This is when the withdrawal “buckets” strategy comes into play.  This strategy divides your retirement savings into 3 buckets: short-term, intermediate-term, and long-term.

  • The short-term bucket should contain money you'll need to live on for the next 3–5 years. You should consider investing this money in traditionally safe, liquid assets, such as cash, cash equivalents, and short-term bonds.
  • The intermediate bucket should contain money to cover expenses for the next 5–10 years. Consider longer-term, high-quality bonds and certain stocks, including utilities and REITs for this investment.
  • The long-term bucket should hold investments that will continue to grow throughout your retirement. This is where you may want to consider stocks and long-term bonds.

Want a personalized retirement withdrawal strategy?

Working with an advisor can help you determine which strategy is right for you. Call us at 844-896-5677 Monday through Friday, 8 a.m. to 8 p.m., Eastern time.

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How to choose an initial withdrawal amount

No matter which strategy you choose, you'll start by selecting a withdrawal amount for the first year. As you do this, you’ll want to consider factors like your total liquid assets, other sources of income, sensitivity to income taxes, and Medicare surcharges. In the planning phase, many retirement calculators rely on this as a critical component to determine how much you need to save.

Although 4% is a popular guideline, some experts believe it’s "safe" only for specific time frames and allocations. And safe means different things to different people. For you, 4% could be too much—or too little. Here are the factors we consider when choosing a withdrawal rate for a client:

4 levers affecting withdrawal rates

Read chart description

This graph illustrates the 4 factors that influence how much or how little you should withdraw. The first line, time horizon, shows that you should withdraw at a lower rate if you have a longer horizon and at a higher rate if you have a shorter one. The second line, asset allocation, shows that you should withdraw at a lower rate if you have a more conservative asset allocation and at a higher rate if you have a more aggressive one. The third line, spending flexibility, shows that you should withdraw at a lower rate if you don't mind less spending flexibility and at a higher rate if you'd prefer more spending flexibility. The fourth line, degree of certainty desired, shows that you should withdraw at a lower rate if you desire a higher degree of certainty and at a higher rate if you're comfortable with a lower degree of certainty.

Dynamic withdrawal strategy

Since many people equally prioritize spending levels and portfolio preservation, we created a retirement strategy that helps achieve both important goals—covering current spending while aiming to preserve enough money for the future.

Dynamic spending is a hybrid of the dollar-plus-inflation and percentage-of-portfolio strategies. It builds on people's natural tendency to spend more when markets are up and less when markets are down—but moderates the wild swings you get when giving market performance free rein over your spending.

In other words, it achieves a happy medium. Your spending is more flexible than with the dollar-plus-inflation approach but also more stable than with the percentage-of-portfolio approach. It's also completely customizable, so in addition to deciding how much to withdraw the first year, you decide how much you're willing (and able) to raise or lower your spending in response to market movements.

To use dynamic spending, you calculate the upcoming year's spending by adjusting the amount of this year's spending based on your portfolio return for the year. But you don't go any higher than the "ceiling" or any lower than the "floor" you set as part of your strategy. 

Spectrum of spending rules

Read chart description

This graph shows the spectrum of the 3 spending rules. On the left is the dollar-plus-inflation rule with a 0% ceiling and floor, in the middle is the dynamic spending rule with a 5% ceiling and –1.5% floor, and on the right is the percentage-of-portfolio rule with an unlimited ceiling and floor. Underneath the spending rules are 4 lines showing the different portfolio characteristics and how each rule impacts them. The first line, market performance, shows that dollar-plus-inflation ignores market performance, dynamic spending is somewhat responsive to it, and percentage-of-portfolio is highly responsive to it. The second line, short-term spending stability, shows that short-term spending stability is stable with dollar-plus-inflation, fluctuates within limits with dynamic spending, and is variable with percentage-of-portfolio. The third line, spending flexibility, shows that spending flexibility is less flexible with dollar-plus-inflation, more flexible with dynamic spending, and highly flexible with percentage-of-portfolio. The fourth line, portfolio viability, shows that portfolio viability is unpredictable with dollar-plus-inflation, is more stable with dynamic spending, and can't be depleted with percentage-of-portfolio.

This framework allows you to decide how much you want to benefit from good markets by spending a portion of those gains. And it enables you to weather bad markets without substantially reducing your spending.

Best of all, dynamic spending can mean greater spending levels throughout retirement. For example, our historical research3 showed that a retiree with a portfolio of 50% stocks/50% bonds could withdraw 4.3% a year with 85% confidence that the portfolio would last through 35 years of retirement. But by incorporating dynamic spending, with a –1.5% floor/5% ceiling, that retiree could withdraw 5.0% a year and have the same level of confidence.

Dynamic spending on FIRE

Careful spending is even more important for early retirees. We looked at sustainable withdrawal rates for the "financial independence retire early" (FIRE) community and found a safe withdrawal rate of 3.3% for someone with a 50-year time frame using the dollar-plus-inflation strategy. But by using dynamic spending instead, the safe rate increased to 4.0%.4

Setting your floor and ceiling as well as deciding on the right initial withdrawal rate means you'll need to make several decisions and maintain an additional level of oversight to use dynamic spending. And since all these factors depend on your personal time horizon, asset allocation, retirement income sources, and priorities, there's no right answer for everyone.

If you're interested in incorporating dynamic spending into your withdrawal strategy, you can learn more in our research paper, or set up a consultation with a Vanguard advisor.

Learn more about dynamic spending

Ready to build your withdrawal strategy?

Working with Vanguard gives you access to advisors who are fiduciaries—obligated to act in your best interests. You can take your withdrawal strategies to the next level while possibly minimizing taxes with a Tax-Efficient Retirement Strategy (TERS). As a Personal Advisor Select client, your advisor can use this exclusive and sophisticated tool to help build a withdrawal strategy that accounts for your personal tax situation and your income needs, while also helping preserve your portfolio. Based on your asset level, you may want to explore this offer further.

844-896-5677
Monday through Friday, 8 a.m. to 8 p.m., Eastern time

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1Source: Vanguard, Drawdown from Financial Accounts in Retirement (Thomas J. De Luca and Anna Madamba, July 2021).

2This is an example of a possible ceiling/floor combination. When you use dynamic spending, you set your ceiling and floor based on your individual situation. An advisor can help you choose the combination that makes sense for you.

3Source: Vanguard, From Assets to Income: A Goals-Based Approach to Retirement Spending (Colleen M. Jaconetti, CPA, CFP®, et al., April 2020).

4Source: Vanguard, "Fueling the FIRE movement: Updating the 4% rule for early retirees." July 2021.

 

All investing is subject to risk, including the possible loss of the money you invest.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Neither Vanguard nor its financial advisors provide tax and/or legal advice. This information is general and educational in nature and should not be considered tax and/or legal advice. Additional tax rules not discussed herein may also be applicable to your situation. Vanguard makes no warranties with regard to such information, or the results obtained by its use, and disclaims any liability arising out of your use of, or any tax positions taken in reliance on, such information. We recommend you consult a tax and/or legal advisor about your individual situation.

Certified Financial Planner Board of Standards Inc. owns the certification mark CFP® in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

Vanguard's advice services are provided by Vanguard Advisers, Inc. ("VAI"), a registered investment advisor, or by Vanguard National Trust Company ("VNTC"), a federally chartered, limited-purpose trust company.

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