When it comes to in-retirement income—and specifically the amount you can safely withdraw from your portfolio without running out—I've got good news and bad news.

Chances are you've already heard the bad news, but I'll repeat it just in case. Thanks largely to low starting bond yields, which in turn depress a portfolio's return potential, new retirees should start with a lower withdrawal percentage than the standard guidance of 4%. Doing so will cut the odds that they'll prematurely deplete their funds over a 25-to 30-year retirement time horizon and help blunt the impact of a bad equity market occurring early in retirement.

That's sobering for people just embarking on retirement, but there's a good news story, too. A lower starting withdrawal percentage is advisable largely because core investment assets—stocks and bonds—have performed so well so long. That means that at the very same time that investors are being urged to lower their withdrawal rates, most investors' portfolio balances are enlarged. Because the lower starting withdrawal rate is calculated on a larger amount, the net effect for most retirees' actual spending is apt to be minimal.

The thinking behind a lower percentage

The drumbeat of bad news about withdrawal rates started in earnest in 2013, with a paper called "Asset Valuations and Safe Portfolio Withdrawal Rates," co-authored by retirement researchers Wade Pfau, Michael Finke, and David Blanchett. The paper noted that the combination of elevated equity valuations and low starting bond yields makes the standard 4% guideline dangerous, especially for people whose portfolios were overly reliant on bonds. "We find the probability of success for a 40% equity allocation with a 4% initial withdrawal rate over a 30-year period is approximately 48%," the researchers wrote. Most retirees, meanwhile, would prefer that the odds that they'll run out of money during retirement be better than a coin flip.

Of course, equities have performed well since that time, and bond returns have been solid, too. While yields have declined, that boosts bond prices—a positive for holders of bond funds, especially. Retirees who reined in spending eight years ago in anticipation of an unforgiving market environment would have done so prematurely. But in a conversation on The Long View podcast in April 2020, Pfau stood firm with the assertion that a 4% starting withdrawal was too rich, particularly given the Fed's ultralow-interest-rate policy. "Lower interest rates are going to push you toward something like 3% being a lot more realistic than 4% as a sustainable strategy in a low-interest-rate environment," he said.

It's hard to find too much fault with that logic. Yes, bond yields have been low for quite a while, but a strong equity market and declining yields—which push up bond prices and boost the returns for bond funds--have effectively supported higher in-retirement withdrawal rates over the past decade. Whether those conditions can persist into the future is the big question for new retirees, and that's where the recommendations for a lower starting withdrawal rate come in.

But that doesn't mean a lower withdrawal

On the positive side, however—and I fear that this sometimes gets lost in the shuffle—we're talking about withdrawal rates, specifically, the percentage you can withdraw from your portfolio in year one of retirement. As it happens, though, the caution about lower withdrawal rates coincides with a period when many investor portfolio balances are enlarged. That means for many new retirees today, taking a smaller starting withdrawal percentage doesn't necessarily translate into an unpalatable standard of living in retirement, because it's a smaller percentage of a pie that's larger overall.


To use a simple, admittedly arbitrary example, let's say an investor retired in early 2011 with a $1 million 60% equity/40% bond portfolio. If she were using the 4% withdrawal guideline—$40,000 initially with that amount inflation-adjusted by 3% annually—she'd have pulled about $460,000 from her portfolio over the past decade.

Meanwhile, let's say someone who was 55 and had a $500,000 60/40 portfolio back in 2011 is ready to retire today. Thanks to market appreciation and assuming that she hadn't been engaging in regular rebalancing, her portfolio is now worth about $1.4 million. Even if she has to take a lower starting withdrawal of 3%, her larger balance means that her first-year withdrawal is about $41,722. Her first decade of withdrawals, assuming 3% initially with 3% annual inflation adjustments thereafter, would be about $478,000, roughly in line with the 2011 retiree's. In terms of her take-home payout, her larger starting balance relative to the 2011 retiree helps make up for the fact that the advisable starting withdrawal percentage is lower.

New retirees in 2031 or some other point in the future may get a crack at a higher safe withdrawal percentage. But that would likely be because equity valuations had contracted and/or bond yields had gone up, which would probably have reduced their portfolio values somewhat. In other words, higher starting sustainable withdrawal rates will tend to occur after poor market returns, when balances are lower. Meanwhile, lower sustainable withdrawal rates will be advisable after periods of good returns and enlarged balances.

Your mileage may vary

It's also worth noting that criticisms that 4% is untenable in a low-yield world relate to starting withdrawal rates. The worry is that if a retiree takes out 4% of her balance in year one of retirement, then subsists on that same amount, with inflation adjustments, in subsequent years, she runs too high a risk of prematurely depleting her money over a 25- to 30-year period. The reason is that such a system doesn't factor in the portfolio's value as the years go by. If she encounters big losses in her portfolio but blithely keeps taking out the same dollar amount, that will lead to too-high withdrawals at an inopportune time. That risk is particularly great in the early years of retirement.

For example, let's say a retiree were taking fixed real dollar withdrawals from a $1 million portfolio, starting with 4% initially. Her year-one withdrawal would be $40,000 and her year-two withdrawal would be right in that same ballpark, perhaps a bit higher if she takes a raise for inflation. Behind the scenes, however, her portfolio could have dropped to $700,000 in year two of retirement, bringing her actual withdrawal percentage to 5.9% that year. She maintained her standard of living but did so at the expense of her portfolio's sustainability.

In practice, retirees may be able to be more flexible in their withdrawals, taking more in strong market environments and less in weak ones. Such strategies, whether the RMD method or Jonathan Guyton's "guardrails" approach, add more variability to the retiree's spending in exchange for improving the portfolio's sustainability. Much of the latest research around sustainable withdrawal rates points to the benefits of flexibility for retirees who would like to ensure that they don't run out of funds prematurely.

Still, a key challenge for setting your withdrawal rate in retirement involves weighing how much variability in cash flows you're willing to endure in exchange for improving your portfolio's sustainability. Ultimately, it's a highly personal decision, and one that can get lost in the discussion of the "right" withdrawal rate.