How to live it up in retirement without outliving your money

Some years back I wrote a book on the topic of how to withdraw your money once you’re retired.

This is such a big financial step that it could be called: “When your portfolio starts paying you.”

This question might sound like a cure for insomnia: Should you take fixed distributions or variable distributions?

But it’s more interesting if you phrase it like this: Should you plan to take out enough money to meet your needs, or should you take out only what your portfolio can “afford” to pay you?

In an ideal world, these numbers would be the same. In real life, that’s rare.

Executive Summary

• If you take out what you need every year and adjust for inflation, you’ll likely be fine for a while — but high inflation can make this unsustainable.
• If you take out only what your portfolio can afford, you may have to tighten your belt during bad markets or inflationary periods.
• If you retire with ample savings, you can often avoid both problems.

Assumptions

Let’s assume you retire with $1 million and determine that you need $50,000 in your first year of retirement.

That equals a 5% withdrawal rate — so initially, what you need and what your portfolio can afford are the same.

I’ll assume the portfolio is split evenly between the S&P 500 index and five-year U.S. government bonds, starting in 1970, using actual market returns and inflation.

Table 1: Fixed Withdrawals (Inflation-Adjusted)

Notice that withdrawals rise sharply due to inflation. By 1979, withdrawals were nearly 9.5% of the portfolio — an unsustainable rate.

Table 2: Flexible Withdrawals (5% of Portfolio)

Under this plan, spending dropped sharply in the mid-1970s and did not recover its inflation-adjusted value for decades.

Table 3: Flexible Withdrawals With Ample Savings

Now assume you retired with $1.5 million but still needed only $50,000 for essential living costs.

This approach delivers the best outcome: a healthy portfolio, spending well above basic needs, and flexibility for extras.

If you’re already retired and can’t significantly increase savings, managing spending may be your best option.

For more on this topic, check out my podcast: “Flexible distributions, the ultimate retirement strategy.”

Richard Buck contributed to this article.