Safe Withdrawal Rule in the Real World

Two Ideas for Withdrawal Plans in Retirement

Consider two different withdrawal plans for retirement in the real world. As we all know, no one actually follows the 4% rule. Spending is variable and there are spending shocks for which to account.

Let’s first look at why the 4% safe withdrawal rate doesn’t work, and then consider the two withdrawal plans.

Why the 4% Rule Doesn’t Work

Consider a common starting point for retirement withdrawals: the 4% Safe Withdrawal Rate. This rule promotes spending 4% of the portfolio the first year and then increasing yearly by inflation.

We understand that the 4% rule is not an honest retirement strategy! Have a look.

Why the 4% Rule Doesn’t Work in Retirement

Why the 4% Rule Doesn’t Work in Retirement

Above, withdrawals (in gold) from age 63 are variable. Initially, they are large, and then they decrease as social security (purple) starts at age 70.

But even before (and after) that, there are other sources of income to consider. There might be a pension or real estate income (dark blue). And in lime green, perhaps a period certain annuity that ends at age 74. Finally, a QLAC that kicks in at age 80.

Where is the 4% withdrawal that adjusts with inflation? As you can see, the withdrawal rate is large, then smaller, then…

How can one deal with these changing demands on the portfolio? I suggest one of two withdrawal plans.

Two Withdrawal Plan in Retirement

Here are two ideas for withdrawals in retirement. They depend on how much cash you want to keep around, versus how much you want to replicated a paycheck coming in every two weeks.

Let’s call these plans the cash bucket withdrawal plan, and the paycheck withdrawal plan.

Both start in December the year prior. This is when you determine how much you are going to spend the next year. Next, review your portfolio, take RMDs (or do QCDs for the current year), and sit down with your CPA to decide all the above. Remember, tax-optimization in retirement takes yearly review to determine your tax bracket and withdrawal goals.

So, do you want a lot of cash sitting around, or do you want a paycheck?

Cash Bucket Withdrawal Plan

I like this plan better, so let’s start with it.

With the Cash Bucket Withdrawal plan, you start the year with 2-3 years worth of cash just sitting in the bank earning zero point nothing. Then, you spend the cash down to 1-2 years worth, and in December, rebalance your accounts when you sell what you need for the next year.

That’s it! Once a year, you rebalance your brokerage account, pre-tax retirement accounts (hopefully just one or two IRAs at that point), and Roth IRAs while you decide how much to pull out. This generally should happen in December with the help of your CPA. Fill up and optimize those tax brackets!

Paycheck Withdrawal Plan

With this plan, you decide which account you are pulling from, and you set it up to automatically deposit money in your checking account every month for the next year.

If you are pulling from your IRA, you will need to go in a sell funds a couple times a year to have the cash to pull. Sell high in order to rebalance. If you are pulling from your brokerage account, you will need to face the same issues as you decide how much to pay every year in capital gains.

With the paycheck method, you should still have 6-12 months of cash lying around for spending shocks, but you keep much more invested and need to (monthly or quarterly) free up investments in order to provide liquidity for the paychecks.

Other Sources of Income in Retirement

Please note that there are many sources of retirement income. These sources of income change over the year, which is part of the reason you can’t just “set it and forget it” when it comes to retirement spending.

Also, one might consider flooring in their withdrawal plan as well. Here you have guaranteed sources of income to cover ongoing necessary expenses. It is really nice to have social security, pensions, and annuities roll on in every month to cover your fixed costs. Above this, you only need withdrawals cover your variable spending.

Order of Withdrawals in Retirement 

What does a withdrawal plan actually look like in retirement? Let’s consider how variable the spending rate actually is over time given that different income sources turn on at different times.

Two Withdrawal Plans in Retirement

Withdrawal Percentage in Retirement

Above, consider the actual withdrawal rate as other sources of income kick in.

Here, you actually start out close to 6% withdrawal, but that is ok!

Once Social security kicks in at 70, you drop off to 3 and change. This then increases overtime but drops down again when you are 80 and your longevity insurance kicks in.

As you can see, it might be nice to have guaranteed sources of income cover about 3% of your needs, and then spend variably above that. This is a strategic withdrawal plan!

Summary: Safe Withdrawal Rule in the Real World- Two Withdrawal Plans

So, what is the safe withdrawal rule in the real world? It is not 4%!

Rather, one much understand how the various income sources interact over time. We all have some flooring, and we might have different sources of income that come and go with time.

Then, determine if you want to live on cash and fill that cash bucket once a year, or have more of a paycheck from active pruning of your accounts.

Those are two types of withdrawal plans one might consider in retirement.

Posted in Retirement Income Planning and tagged .


  1. This is a very thoughtful article. I am doing a cash bucket type plan in my retirement. I think it helps me that most of my career I never really got a paycheck because I owned my practice. I was used to figuring out what I needed and investing the rest. The cash bucket refills itself dividends and muni bond interest as well. Once retired I think a cash bucket gives you some degree of psychological peace when big down turns occur.

  2. Very good points, I just started a 3% withdrawal this month which I’ll stick with for the next five years. At that time I’ll start taking Social Security and will drop to a 1% withdrawal. My withdrawals are done totally from the bond component of the accounts and that is automatically rebalanced with the stock portion. If stocks are up the rebalancing will come from selling some of them and if stocks are down the rebalancing will come from the bond side, automatically.

  3. Love the cash bucket withdrawal plan. Appreciate sharing this important information and I do enjoy reading your articles. Keep up the great work.

  4. Love the cash bucket withdrawal plan. Appreciate sharing this important information and I do enjoy reading your articles. Keep up the great work.

Comments are closed.