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Flexible Safe Withdrawal Rate Strategies

Exploring Withdrawal Rates That Can Pay You A Bonus

Will you have enough retirement income with a 4% safe withdrawal rate? What if the markets perform poorly, do you adjust your withdrawals? And if the markets perform well, do you withdraw more money? The good news is that there are flexible withdrawal strategies to help your money last longer.

The safe withdrawal rate is the maximum amount of money that you can withdraw from your retirement savings every year without running out of money. The withdrawal rate is calculated by taking 4% of your starting balance as income while allowing you to increase your income by the inflation rate each year.

The 4% rule as it’s now dubbed, was designed to be the worst-case scenario given market corrections over a 35-year period. It has since become the default withdrawal rate for those in retirement who want to know how much they can safely withdraw for income without outliving their savings.

Over the years, there has been much debate as to whether the 4% withdrawal rate is too aggressive, especially in the early years of retirement. Others argue the rate is too conservative. Also, interest rates are far lower today than when the safe withdrawal rate was introduced in 1994.

Whether the markets perform well or perform poorly, there are flexible variations of the 4% rule, designed to help your money last longer while also allowing you to increase your income from time to time when the markets perform well. In this article, we’ll analyze a couple of those strategies.


Safe Withdrawal Rate With A Balance Trigger

The 4% rule calculates your yearly income amount so that it provides enough income in case of market corrections in retirement, but it doesn’t necessarily mean that you can’t take more money out if the market does well. In the upcoming examples, Social Security income is not factored in for ease of discussion. We’ll address Social Security after we review the strategies.

Below is a variation of the 4% rule, except it allows you to increase your income withdrawal rate only if your retirement portfolio has grown by 50% from the starting balance.

  • In the table below, we can see that in year one, Mary has $1,000,000 saved for retirement. Her withdrawal amount is $40,000 at a 4% safe withdrawal rate.
  • Each year afterward, Mary can withdraw $40,000 plus any adjustments for inflation increases. Please note, in this example, we’ll assume inflation is zero.
  • By year ten, Mary’s retirement balance has grown to $1,500,000 due to gains in the financial markets.
  • Mary can increase her withdrawal amount by 10% boosting her income to $44,000 in year ten (10% * $40,000).
  • Mary’s withdrawal rate is now 4.4% (10% added to the 4% original safe withdrawal rate equaling .4% for a total of 4.4%).

Please note, the increases in the withdrawal rate are calculated off Mary’s starting balance of $1,000,000 not the new higher balance of $1.5mm.

Benefits And Key Factors:

This strategy allows Mary’s savings to grow for a few years before she can withdraw any additional income. The balance contingency helps preserve Mary’s savings while allowing her the option to increase her income when her portfolio has grown by 50%. In short, Mary gets to enjoy her retirement as her portfolio grows.

An income floor of $40,000 is established whereby Mary will never take out a lower income than year one’s initial withdrawal amount.

Flexibility is allowed provided you don’t overspend. The above example can be modified. For example, instead of 50%, you might increase your withdrawal rate if the balance grew by 30%. Also, increases in income can be limited to no more than two years, for example, so not to overdo it. However, before making any decision, please consult your financial planner to ensure you don’t increase your income by too much and risk running out of money in later years.


Base Pay Plus A Bonus

In our next strategy, you start off your retirement with a safe withdrawal rate that pays your need expenses, such as electricity, food, etc. This is your base pay or salary.

You can increase your withdrawal rate only if your portfolio performs well. This is your bonus pay for your want expenses. Let’s look at an example.

Base-Pay Plus A Bonus Strategy Example:

Joe has $1,200,000 saved for retirement and has opted to withdraw 3% per year of his starting balance. This is his base-salary. However, if his portfolio grows by 10% or more for two consecutive years, Joe’s withdrawal rate increases to 4% as a bonus.

  • Joe’s base salary in retirement will be $36,000 not including Social Security benefits.
  • From the table we see, Joe earns $36,000 in his first few years of retirement.
  • In years 4 and 5, Joe’s portfolio grows by more than 10%.
  • In year 6, Joe’s bonus kicks in, and he withdraws $48,000 as income.
  • In year 7, Joe withdraws 4% again as his portfolio continued to grow by over 10%.

Benefits And Key Factors:

  • It’s important to note that in years six and seven, Joe’s withdrawal rate of 4% is configured off his starting balanceof $1,200,000 in year one.
  • Also, Joe’s bonus doesn’t kick in until two consecutive years of 10% or more growth. Of course, you can tailor the requirements to be more or less, but please be cognizant that your bonus should be just that; A bonus.
  • The strategy is designed to let you enjoy your retirement when the market is performing well while ensuring you don’t run out of money.

What happens to Joe’s income when the market performs poorly and his portfolio declines?

  • In year 8, Joe’s portfolio fell by 20% due to a stock market correction, see table below.
  • As a result, Joe’s withdrawal rate adjusted back to his initial rate of 3%. His income in year eight is $36,000 or 3% of his starting balance of $1,200,000.


In the prior examples, Social Security benefits were not included in the base salaries. Of course, your benefit depends on a few factors including what year you begin collecting. If you collect early or at 62 years old, you’ll receive fewer annual benefits than if you wait until you’re 67 years old. However, Social Security can be a key component in helping you determine your base pay.

For example, if Joe’s expecting $20,000 per year from Social Security, and his base withdrawal rate of 3% equals $36,000; his total income would be $56,000 per year. Think of Social Security as a way to bolster your base pay and cover your need expenses.

By combining a flexible, safe withdrawal rate strategy along with your Social Security income, you can give yourself a base pay that covers your need expenses while allowing you to receive a nice bonus in the years when your portfolio does well. It’s important to remember not to over do it with your bonuses in the good years to ensure your savings lasts throughout your retirement.

Since your retirement could last for 35 years or more, you can opt for a 3% withdrawal rate until your portfolio grows by a certain amount. After a few years have passed, you can reassess your withdrawal rate with your financial planner. Remember, interest rates are still rather low and its uncertain as to whether the stock market will continue its current path higher. However, if the market performs well and your portfolio is growing, you might just be able to pay yourself a bonus for a year or two and enjoy your golden years.