Whilst a good rule of thumb the 4% Withdrawal Rule will fail to maximise the income of retirees.   Many will die leaving large legacies when they could have enjoyed a far higher income during retirement.  Many retirees will also through fear of running out of money withdraw far less from their retirement portfolio than the safe maximum. Variable Withdrawal strategies tackle the deficiencies of the 4% Rule by providing a set of rules to indicate how much money the retiree can safely withdraw.
This post looks at one variable drawdown strategy which would have allowed a UK retiree to on average withdraw 70% more income during a 35-year retirement compared with taking a Bengel-style inflation-linked income whilst providing more income during the important first 15 years and minimising sequence of return risk.


The Problems With The 4% Rule

Without a doubt, William Bengen´s research which culminated in the 4% Rule in the 1990s revolutionised retirement planning.  Bengen proved that historically a US retiree could take an initial income of 4% from his portfolio and increase this by the rate of inflation for 30 years and not run out of money.

However, the 4% Rule attempts to do the impossible –   generating a pre-determined income from a portfolio that is subject to market performance and unknown inflation.  The consequence of this is that the strategy has to work with the worst historical combinations of market performance and inflation meaning that the vast majority of drawdowns will be far too conservative – resulting in large final portfolio balances and generous legacies for the heirs.
However, despite the probability of leaving a big chunk of money behind the retiree must contend with the risk (hope!) of living longer than 30 years and the risk that history doesn´t repeat itself and that market returns are lower and inflation is higher.  So even if theory says 4% is OK most retirees will play safe withdraw less and perhaps only late into retirement will realise they could have had a far higher income.
The rule says don´t worry about your portfolio performance don´t worry about hyper-inflation – carry on spending and all be OK in the end.  Not many in our working lives have been able to do that.

An Inflation-Linked Income May Not Be The Ideal

In a recent post about partial annuitisation I looked a little at the research into the spending characteristics during retirement.  These fall into two categories:-
      • Real levels of spending were maintained during the first decade followed by spending falling in real terms.
      • “Smiley Face” spending – initial real spending levels reducing to a minimum then increasing due to medical and welfare costs.
The latter is more common in countries with poor state welfare provision.
The Bengen inflation-linked income fits into neither of the above categories.  In the UK the first spending characteristic is likely to be the most representative as even if residential care is needed in later life whether one has had an inflation-linked income or not is unlikely to make any difference to the ability of the retiree to manage the potential financial shock of residentialcare. There is also evidence (see article  “Understanding Retirement Journeys“) that the majority of retirees, even those that could be classified as “just making do”, spend below their income level during the latter part of retirement.  Income withdrawal strategies that maximise income during the early part of retirement would be optimum for the majority of retirees.

Variable Withdrawal

Variable withdrawal strategies provide a  mechanism for indicating how much can be withdrawn from a portfolio – minimising the risk of running out of money but maximising the amount that can be withdrawn. 
There is much research published proposing possible schemes.  With the simplest scheme you just withdraw a fixed percentage of the portfolio value each year – you never run out of money but the income can vary dramatically.  Another more complex strategy varies withdrawal in accordance with your statistical life expectancy.
None of the strategies can offer a perfect solution and Michael McClung in his book “Living Off Your Money” analyzed some of the key strategies and all provided superior withdrawal efficiencies compared to Bengen inflation-linked withdrawals.
In looking for a suitable strategy for myself simplicity was the key factor.  I wanted a strategy that I could describe in a few words and hand over to whoever administers my finances if the day arrives that my mental abilities decline.  Many of the published strategies are far from simple and in fact, the first strategy I designed was very effective but complex and used a dynamic model that could only be implemented on a spreadsheet and simplicity was a crucial factor for me. 
A simple but effective scheme that appealed to me was Michael Kitces´ “Ratcheting Variable Drawdown”.  This increases the annual income over and above the inflation-adjusted income when the portfolio value is at least 150% above its initial value.  It is one of the simpler plans to implement.
After much simulation with UK and US data, I found a variation of this scheme offered greater resilience, a higher initial drawdown rate, and by taking some additional payments as an optional bonus rather than an income ratchet the retiree has the option of “leaving the money on the table” to leave a larger legacy or to defer income due to minimise tax.
For ease of future reference, I’ll call my variable drawdown scheme “MaxVar”.  No spread sheets are needed and it can be explained in a few lines:-
    • Select an initial withdrawal rate.  For the UK 2.5% to 4% and US 3% to 4.5%.
    • Withdraw the first income at the start of retirement
    • At every annual anniversary:-
      • If the portfolio value is greater than the initial portfolio value  increase the income withdrawal by the rate of inflation. If not greater withdraw the same amount as the previous year
    • If the actual portfolio value is 1.5 times the initial portfolio then take a bonus of 5% of the difference between the actual and initial portfolio value.


    • The initial withdrawal rate has little effect on the total income received during retirement but the higher the rate the more income received during the first 15 years.
    • The bonus is optional.  If you don´t take the bonus the final legacy will be higher.
    • The income will not reduce in nominal terms but may do so in real terms.
    • The strategy has been tested on 35-year retirements from 1920 to 1985 for the UK and US-based on a 60/40 equity/bond portfolio with costs assumed at 0.3%.
    • Increasing the equity proportion increases the income received and final portfolio balance.
The table below gives an example for the first 4 years of drawdown starting with a £100,000 portfolio and an initial withdrawal rate of 4%.  The only data that the retiree has to have at hand is the amount of the previous years’ income (excluding any bonus), the current and initial portfolio values, and the rate of inflation.
Table Showing Example of MaxVar Variable Drawdown

Simulation Results


The table below compares MaxVar with traditional Bengel-style inflation. adjusted withdrawal with a 60/40 equity bond portfolio (FTSE All share equivalent and long-term gilts). Retirement periods are 35 years with start years from 1920 to 1985.  The maximum safe withdrawal rate for zero failures is 4.3% for the variable withdrawal strategy and 3.1% for Bengen inflation-linked withdrawals (assuming 0.3% expenses).
MaxVar delivers around 70% more income compared to Bengen, but of course at the cost of the final portfolio value.  Bengen on average leaves 100% more legacy and a maximum of up to £5,000,000 more.  This is an obvious consequence of taking less income – the portfolio has more time to grow.  This can also be seen from the different initial withdrawal rates of the variable withdrawal strategy – the lower the initial withdrawal rate the larger the final legacy.
Table comparing income and final portfolio value using variable drawdown
The initial withdrawal rate of MaxVar has little influence on the total income received.  It does however impact both the final legacy and the income received during the early years of retirement.
The table below compares income during the first 15 years of retirement for different initial withdrawal levels.  The higher the initial withdrawal rate the higher the early-years income and in all cases the income is higher than that from Bengen:-
Table Showing First 15 Years Income From Variable Drawdown
The variable strategy gives the retiree the option of taking the bonus of leaving some or all of it invested.  This may be convenient for tax reasons or in order to leave a higher legacy.
Table Showing Income and Final Portfolio Values Using Variable Drawdown

A Higher Margin of Safety

The chart below shows the safe withdrawal rates (35 years) for MaxVar compared to Bengen for equity contents in the portfolio ranging for 0% to 100%.  The variable strategy allows at least a 1% higher SWR and an SWR which progressively improves with equity content  –  at 100% equity, the SWR is 4.9% compared to 3.4% for Bengen.
Graph of Withdrawal Rates For Different Equity Content

US Data

I have performed the same analysis for the US market – with a 60/40 portfolio of US Total Stock Market and the US Total Bond Market.  The results are shown in the tables and graphs that follow:-
Table of US Portfolio Drawdown Income and Legacy For 35 Year Retirement
Table of Drawdown Income Without Any Bonus
Table of US Drawdown Income Versus Initial Drawdown Rate
Graph of Safe Withdrawal Rates versus equity content of a portfolio

Comments on US Data

    • The US Bengen safe withdrawal rates are significantly higher than those for the UK (US Bengen 3.85% v 3.1%)
    • The US MaxVar SWR is slightly higher than that of the UK (4.5% v 4.4%).
    • Optimum SWRs for Bengen and Max-Var are 40% to 60% and the SWR for MaxVar declines with equity content over 50%.
    • Income from MaxVar is on average 40% higher than from Bengen (70% higher in the UK).


Of all the strategies related to retirement income drawdown that I have researched Variable Drawdown is the one that excites me the most and is the strategy most likely to align retirement income with spending patterns.  It has the potential to:-
      • Provide greater safety from the sequence of return risk
      • Produce more total income than the classic Bengen inflation-linked income
      • Produce more income during the first years of retirement
      • Offer a higher Safe Withdrawal Rate than Bengen
      • Allow the retiree balance income against potential legacy
      • Automatically adjusts income to portfolio performance
There is a multitude of different variable drawdown strategies available which are well documented and analysed and which may be preferred by some retirees.  My own MaxVar system appeals to me due to its simplicity and robustness and historically there are very few retirement periods where the retiree would have received more income by adopting a Bengen-style withdrawal plan.


  • Hi Max. As far as I can see, this approach ignores cash savings. In my case, I expect to hold several years income as a cash buffer. This allows me to smooth over great variations in the main fund, and allows pot maximisation as I can adapt strategy (even forego withdrawals) as I "look back" on events in my savings window. Eg UK tax minimisation.

    It would be very interesting if a test case and initial conditions can be used as a trial for these methods, including a cash buffer.

    For my own simulations, I use a quite noisy signal for yield pa (from -30% to +24%) with a tunable element, so I can set long-term growth vs. inflation.

    What I do then is to define a total yearly income above costs profile (rises to 75 then drops) which again is tunable by a starting value and use a ML system to play with yearly withdrawals, whilst obeying rules re how far I want my cash buffer to swing. This explores various drawdown / savings pull mixes per year, finding overall optimums.. and then bumps up the year 1 pull factor and optimises again etc. till it can find no better solution (this via a Solver as used in many spreadsheets).

    Way more complex and I'm never sure if it found the best outcome! Yet the approach decouples my income from wild yield swings and allows injection of cash e.g. from downsizing ££ thus I can explore possible extreme scenarios.

    The effect of yield above inflation seems key.

  • Max says:

    Hi Disillusioned, no I’m not considering cash as a complement to Variable Drawdown. I see most retirees as having multiple income streams integrating within an overall retirement income strategy. In my own case I have, fixed annuity, state pension, income drawdown and Investment Trust income. Some streams are guaraneed, some guaranteed without inflation linking etc. My MaxVar variable drawdown is at risk of not fully inflation linking but this risk is compensated for by the fixed annuity providind a higher income during the first 10 years of retirement. In terms of cash I only keep emergency cash to cover exceptional expenditures such as car repairs, boiler replacement etc. – with diversified income streams I see no need to have “top up” cash plus I am planning a slight decline in real income during retirement as my spending needs decline.

    Your cash strategy is in effect Prime Harvesting if you consider cash to be part of an equity/bond portfolio where you set rules for when you drawdown on bonds/cash rather than equities. In effect as per one of McClungs’s Prime Harvesting strategies (EM if my memory is correct) you have set a minimum bond holding which is your portfolio bond holding should you ever exhaust the cash. It is incredibly reassuring to hold significant cash but every insurance policy has a cost – in this case a reduction in total asset growth potential but if you have a surplus of assets why not sleep more easily?

    I decided against implementing Prime Harvesting as the benefits don’t appear significantly worthwhile and are dwarfed by those of Variable Drawdown.