Forget the 4% Rule: Planner Explains His Flexible Retirement Withdrawal Strategy

A common retirement withdrawal strategy involves taking money out at fixed rate — say, 4% a year — or adjusting that rate for inflation. Either way, the results may be uneven and reduce a retiree’s nest egg too quickly, states Jonathan Guyton, a retirement planner and researcher, in an interview by Morningstar’s Christine Benz, director of personal finance, and Jeffrey Ptak, head of global manager research.

A “flexible withdrawal” approach allows a retiree to withdraw funds depending on their needs, as long as they stay within “guardrails,” says Guyton, a certified financial planner and the principal of Cornerstone Wealth Advisors, a fee-only firm in Minneapolis.

In what Benz calls his “seminal” paper — “Decision Rules and Portfolio Management for Retirees: Is the ‘Safe’ Initial Withdrawal Rate Too Safe?” — he established “new guidelines for determining the maximum ‘safe’ initial withdrawal rate, defined as (1) never requiring a reduction in withdrawals from any previous year, (2) allowing for systematic increases to offset inflation, and (3) maintaining the portfolio for at least 40 years,” according to the executive summary.

A constant withdrawal rate becomes problematic as, especially in volatile times like now, the principal can drop. But his research found that, using his strategy, retirees could start at a higher withdrawal rate and adjust it downward when needed.

The example Guyton provides is withdrawing a constant 5% on $1 million in savings, which is $50,000. But what happens when the account drops to $800,000? That 5% withdrawal is now a 6.25% withdrawal, which is too high.

“If you hit that number, that’s a warning, that’s the guardrail and you say, I’m going to take that $50,000 down by 10%,” Guyton explained. “Reduce it to $45,000. And that’s all you need to do for a year. You can measure your withdrawal rate the next day if you want, but what really matters is a year from now. If it’s still under 6%, you’re fine. Keep going, give yourself a raise for inflation. But if it gets back up over 6%, it’s like you hit the guardrail again. You need to adjust it down another 10%.”

During the pandemic, the advisor has not seen the guardrail be hit, as it was during the Great Recession, he told Morningstar.