Some years back I wrote a book called “Live It Up Without Outliving Your Money!” , and today I want to revisit one of the most important ideas behind that title.
The way you withdraw money once you’re retired is such a major financial decision that it could be called “when your portfolio starts paying you.”
The basic question sounds simple: Should you withdraw what you need each year, or should you withdraw only what your portfolio can “afford” to pay?
Three key takeaways
- If you withdraw what you need and adjust for inflation, you’ll probably be fine for a while — but a bad market or high inflation can eventually break the plan.
- If you withdraw only what your portfolio can afford, your savings may stay healthy, but your lifestyle may suffer in bad years.
- If you start retirement with truly ample savings, you can avoid both problems.
Let’s see how this works using real market returns and real inflation starting in 1970.
Assume you retire with $1 million and need $50,000 from your portfolio in your first year.
The portfolio is split evenly between bond funds and a diversified four-fund U.S. equity portfolio (S&P 500, large-cap value, small-cap blend, and small-cap value).
Table 1: First 10 years — fixed withdrawals (inflation adjusted)
| Year | Starting Portfolio Balance | Withdrawal |
|---|---|---|
| 1970 | $1,000,000 | $50,000 |
| 1971 | $1,022,203 | $52,785 |
| 1972 | $1,081,167 | $54,509 |
| 1973 | $1,114,604 | $56,366 |
| 1974 | $953,420 | $61,273 |
| 1975 | $820,780 | $68,833 |
| 1976 | $967,334 | $73,607 |
| 1977 | $1,126,578 | $77,188 |
| 1978 | $1,111,600 | $82,361 |
| 1979 | $1,120,716 | $89,788 |
This strategy allowed you to maintain your lifestyle through a difficult decade. But notice two things:
- Withdrawals rose sharply due to inflation.
- By 1979, you were withdrawing about 8% of your portfolio — a rate that is not sustainable long-term.
Table 2: First 10 years — flexible withdrawals (5% of portfolio)
| Year | Starting Portfolio Balance | Withdrawal |
|---|---|---|
| 1970 | $1,000,000 | $50,000 |
| 1971 | $1,022,203 | $51,110 |
| 1972 | $1,083,777 | $54,187 |
| 1973 | $1,116,982 | $55,849 |
| 1974 | $956,028 | $47,801 |
| 1975 | $835,574 | $41,779 |
| 1976 | $1,021,169 | $51,058 |
| 1977 | $1,222,863 | $61,143 |
| 1978 | $1,230,589 | $61,529 |
| 1979 | $1,272,963 | $63,648 |
This flexible strategy kept the portfolio healthy — but it required painful belt-tightening in the mid-1970s. In fact, withdrawals didn’t regain the inflation-adjusted value of the first year until 1989.
What happened later
With fixed withdrawals, the portfolio eventually ran out of money — completely depleted by 2014.
With flexible withdrawals, the portfolio survived — but at the cost of a lower standard of living for the first two decades of retirement.
Neither outcome is ideal.
The Ultimate Distribution Strategy
There is a third path — but it comes with a catch: you must start retirement with more than enough savings.
If you had begun retirement in 1970 with $1.5 million instead of $1 million, a flexible withdrawal strategy would have:
- Always met your essential spending needs
- Kept your portfolio healthy
- Provided a cushion for discretionary spending
I call this approach — starting retirement with more than enough — the Ultimate Distribution Strategy.
If you’re already retired or close to it, controlling spending may be your best remaining tool.
For more on the four-fund equity portfolio used in these calculations, see the related article.
For more detail, listen to my podcast “The Ultimate Distribution Strategy.”
Richard Buck contributed to this article.