Is Your Withdrawal Strategy Actually Safe?

The Most Expensive ‘Safe’ Withdrawal Strategy…

"My plan is to live off the gains and never touch the balance."

On the surface, this makes a lot of sense.

Portfolios have typically averaged mid-to-high single digit returns over the long run, so just scrape off the earnings, never touch the balance, and therefore, never run out of money…right?

Here is the issue: living off the gains is not the conservative version of retirement spending.

Instead, it is a hidden bet that markets will hand you a paycheck on schedule.

The real fear was never "how do I protect the balance?"

It was "how much can I spend without running out?"

Those are different questions with very different answers. This blog is about addressing the second question since I believe it to be the most pertinent.

Take Tom and Karen, both 64, with $2 million saved. Their plan is to spend "just the gains" and leave the $2 million untouched forever.

Assuming a growth rate of 6% per year, that works out to about $120k of income that can be generated from the portfolio without touching the initial principal.

Combine that with Social Security and any pensions, Tom and Karen can afford a decent lifestyle under those assumptions.

So, what’s the issue? There are a few which we will explore.

The Gains Don't Show Up on Schedule

The plan assumes markets produce spendable gains every year. They don't.

In 2022, U.S. stocks and bonds both finished down double digits.

A "live off the gains" retiree had two choices that year: spend nothing, or break their own rule and sell principal at the bottom. Any strategy that works only in up markets is not a strategy.

There is an extreme, yet amusing analogy to draw when talking about average returns in the market.

The guy with his feet in the freezer and head in the oven feels OK “on average.”

Tom and Karen’s 6% spending goal falls victim to that trap. It feels fine as a number on a spreadsheet, but terrible in those gut-wrenching down markets.

Your Balance Is Already Shrinking, You Just Can't See It

Suppose Tom and Karen pull it off and the $2 million never drops a dollar.

Enter what I like to call “the silent killer.”

At 3% inflation, its purchasing power falls by roughly half over 24 years.

Protecting the nominal balance while inflation quietly eats the real one lures you into a false sense of security.

So, What Actually Answers the Spending Question?

There are a few ways to tackle this problem.

• The 4% Rule

• Guardrails-style Spending

• RMD-style Spending

• Fixed vs. Variable Payments

What the 4% Rule Gets Right (and Where It Falls Short)

The famous rule comes from William Bengen's 1994 research: withdraw 4% of your starting balance, give yourself an inflation raise annually, and history says a diversified portfolio survives 30 years, even for people who retired into the Great Depression or the 1970s.

Its core insight is exactly the permission Tom and Karen need: spending principal is part of the plan.

But the 4% rule has real weaknesses.

It keeps you spending the same inflation-adjusted amount whether markets soar or crash.

While his research shows that it could withstand some of the toughest periods in history, living through a market crash in real time is easier said than done.

Also, it was built for a 30-year horizon, so it is not your rule if you retire at 58 and are in good health.

Because it is calibrated to worst-case history, it also leaves most retirees with more money at death than they started with, which is a strange outcome for money you saved to spend.

I always ask people whether they are the type to leave a bunch of money to heirs or the “bounce the check to the undertaker” type.

Most people fall somewhere in between, and their plan should be adjusted accordingly.

Even the experts disagree on the number now: Morningstar's 2026 research puts the safe starting rate at 3.9% for rigid spending, while Bengen's own updated work argues a diversified portfolio supports 4.7%.

Spend Flexibly

• If Tom and Karen can trim discretionary spending in a bad year, guardrails-style approaches can start withdrawals above 5%, cut roughly 10% after market declines, and allow raises after strong runs. Morningstar found flexible methods support starting rates as high as 5.7%.

• If they want spending to track reality automatically, an RMD-style method bases each withdrawal on remaining life expectancy, so the portfolio winds down without ever hitting zero.

• And if a variable paycheck keeps them up at night, the move is to cover fixed expenses with income that arrives regardless of markets (like an annuity).

Conclusion

Tom and Karen’s fear of running out of money led them to target an unrealistic spending plan.

Instead, they could enter retirement with a game plan for spending that gives them the confidence to enjoy the money they worked so hard to save and invest.

There are many ways to plan for spending.

Make sure your plan fits your goals.

This content is for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any security.

Past performance is not indicative of future results. No guarantee of future performance or outcomes is implied.