How Should You Spend in Retirement? Fixed vs Dynamic Withdrawal Strategies
Retirement planning doesn’t end the day you stop working—it just shifts focus. The question becomes: how much can you safely spend each year without running out of money? This seemingly simple issue—known as the withdrawal strategy—has been the subject of decades of financial research. At its core lies a tension between simplicity and adaptability. Should you follow a fixed rule and adjust for inflation each year? Or should your withdrawals fluctuate with market returns, aiming to protect your portfolio from bad luck?
In this post, we explore two major approaches—fixed and dynamic withdrawal strategies—and what the research says about their long-term outcomes.
The Classic 4% Rule: A Fixed Approach
The most well-known withdrawal strategy is the so-called 4% rule, popularised by William Bengen in 1994. Under this approach, you withdraw 4% of your initial retirement portfolio, adjust that figure for inflation each year, and continue doing so for 30 years.
It’s simple. Predictable. But is it safe?
Whilst the 4% rule worked in many historical US scenarios for a 30-year period, more recent research paints a more cautious picture. A landmark study by Cederburg, O’Doherty and Sias (2020) examined data across 38 developed countries and found that a 4% withdrawal rule resulted in failure (i.e., running out of money) in 20% to 40% of cases, depending on the country and market conditions. And that’s assuming you stick to the rule no matter what happens in the market.
Furthermore, thanks to rising life expectancies and earlier retirements, many individuals today face retirement periods that stretch well beyond the traditional 30-year horizon. It’s no longer unusual for retirements to last 35 or even 40 years—especially for couples. This means that withdrawal strategies need to account for greater longevity risk and more extended exposure to market volatility.
Enter Dynamic Withdrawals: Adapting to the Real World
Recognising that markets—and people’s lives—are unpredictable, a growing body of research has explored dynamic withdrawal strategies. These approaches flex spending year to year, based on how the portfolio performs.
One of the most influential methods comes from Jonathan Guyton and William Klinger (2006). Their rules set a target withdrawal rate (such as 4%) but allow for small adjustments—typically within a ±10–20% range—depending on investment performance. If returns are strong, you increase spending. If they’re weak, you cut back. These adjustments only kick in if spending drifts too far from the target, hence the name guardrails. The result? The chance of running out of money plummets, often falling below 5%, whilst spending remains responsive and controlled.
Other researchers, including David Blanchett and Michael Finke, have developed adaptive rules that respond to sustainable withdrawal rates, portfolio volatility, and even longevity expectations. These can be more sophisticated—sometimes involving stochastic modelling or control theory, as in the work of Forsyth, Vetzal and Westmacott (2021)—but they typically deliver both higher lifetime consumption and lower risk of failure than fixed withdrawal approaches.
Figure 1. A comparison of hypothetical withdrawal strategies for illustrative purposes.
What Does This Mean for Clients?
Whilst the dynamic withdrawal research is compelling, it must also be palatable and practical for real people. And this is where theory meets reality.
Few retirees want to hear that a market downturn means that they shouldn’t go on their long-awaited trip to New Zealand. Or that a dream kitchen renovation must be postponed indefinitely because equities have underperformed. Dynamic rules may make academic sense, but they can lead to emotionally difficult conversations—and real frustration—if spending has to be slashed mid-retirement.
People don’t plan for retirement to have their lifestyle dictated by the madness of the markets. They want confidence, flexibility, and dignity. The goal should not be to optimise every last basis point of withdrawal efficiency, but to support a happy and secure retirement—one that clients can actually live with.
Finding the Right Balance
Not every retiree wants to micromanage their portfolio withdrawals. But ignoring market conditions entirely—especially in retirement—can be dangerous. As the research shows, even modest flexibility can dramatically improve outcomes.
For many clients, a hybrid approach works well. This might involve starting with a reasonable base withdrawal rate—perhaps a more conservative 3.5–4%—and then revisiting spending annually based on portfolio health, major life events, and evolving goals. Some may prefer to set floors and ceilings (for example, never spending less than £30,000 or more than £50,000 per year), whilst others may be willing to reduce discretionary spending such as holidays in down years, but keep essentials protected.
Critically, the strategy needs to reflect the individual. For some, the peace of mind that comes with a steady, predictable income outweighs the potential upside of a flexible system. For others, a willingness to adapt may unlock greater freedom over the long term.
Summary Table: Withdrawal Strategy Trade-offs
Final Thoughts
The idea of a ‘safe’ withdrawal rate is ultimately about managing uncertainty. Fixed rules offer peace of mind but can be brittle in the face of volatile markets. Dynamic strategies require more engagement but reward it with flexibility and resilience.
But above all, the withdrawal strategy must be emotionally sustainable. Clients are not spreadsheets. They need clarity, not complexity. Stability, not stress. And above all, they need a retirement that allows them to live—not just survive.
References
Bengen, William P. 1994. ‘Determining Withdrawal Rates Using Historical Data’. Journal of Financial Planning 7 (4): 171–180.
Blanchett, David M. 2017. ‘The Impact of Guaranteed Income and Dynamic Withdrawals on Safe Initial Withdrawal Rates’. Journal of Financial Planning.
Cederburg, Scott, Michael S. O’Doherty, and Richard Sias. 2020. ‘The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets’. Journal of Financial Economics 138 (3): 820–839.
Finke, Michael S., Wade D. Pfau, and David M. Blanchett. 2013. ‘The 4 Percent Rule Is Not Safe in a Low-Yield World’. Journal of Financial Planning 26 (6): 46–55.
Forsyth, Peter, Kenneth Vetzal, and T. Westmacott. 2021. ‘Stochastic Control of Retirement Income Decumulation’. arXiv preprint.
Guyton, Jonathan, and William Klinger. 2006. ‘Decision Rules and Maximum Sustainable Withdrawal Rates’. Journal of Financial Planning 19 (3): 48–57.