5 Alternatives To The 4% Retirement Withdrawal Rule, Ep #321

Do you wish you had more optionality when it comes to designing your retirement? In this episode of Retirement Starts Today, we’ll explore an article from Forbes that poses five alternatives to the 4% rule that you may want to explore for your retirement withdrawal strategy.

In our retirement headlines segment Bret and I team up to answer a question that both Google and ChatGPT got wrong. Find out what it is by listening until the end!

Outline of This Episode

[2:22] The types of spending strategies that can be used in retirement
[13:30] Is creating a donor-advised fund a good way to avoid IRMAA?

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Alternative retirement withdrawal strategies

We’ve all heard of the 4% rule, but it’s best suited for back-of-the-napkin math rather than creating a tried and true retirement plan. If you are looking for alternative retirement withdrawal strategies with more flexibility check these out.

Spending Guardrails – If you have ever listened to this show before you know that I am a big fan of spending guardrails. The way it works is that retirees set upper and lower limits on annual withdrawals which allows for flexibility in response to market conditions and portfolio performance. This approach is based on historical data and aims to strike a balance between over and under-spending.
Bogleheads’ Variable Percentage Withdrawal Strategy – This strategy doesn’t rely on annual inflation adjustments to determine withdrawals. Instead, it considers factors such as age, asset allocation, and portfolio balance to determine the withdrawal percentage for each year of retirement. One drawback is that it can result in variable spending levels, which isn’t ideal for those who prefer a consistent income stream. Additionally, retirees may have to reduce spending in poor markets when they are coupled with high inflation.
The Yale Spending Rule – This approach draws inspiration from endowment spending policies used by institutions like Yale University and combines constant dollar and variable spending strategies. 70% of the distribution is based on the total distributions from the previous year which ensures a stable income stream. The other 30% depends on the average of the fund’s balance over the past three years multiplied by a fixed spending rate. By blending these two components, retirees can strike a balance between preserving their capital and responding to market conditions and inflation.
The Dividend Spending Rule – I’ll preface this one by stating I don’t like focusing on dividends in retirement. This strategy is suitable for those who would like to prioritize leaving wealth for future generations while enjoying a comfortable retirement. It focuses on optimizing dividend income to support current and future generations.
Spend Safely In Retirement Strategy – This strategy combines two straightforward components for retirement income planning: delaying Social Security and RMD-Based Spending. Retirees are encouraged to delay claiming their Social Security benefits until age 70 which results in higher monthly payments, providing a stable income source in later years. Annual spending is then calculated based on the formula used to determine RMDs from retirement accounts. This approach adjusts spending based on market conditions and partially accounts for inflation through Social Security. This strategy offers simplicity and adaptability to changing economic conditions. Delaying Social Security provides a built-in mechanism for increased income over time, while the RMD-based approach ensures that retirees are taking into account their total retirement savings.

These alternative retirement withdrawal strategies offer retirees a range of options to suit their individual financial goals, risk tolerance, and preferences. While the 4% Rule is a useful starting point for retirement planning, it’s important to assess alternatives and choose a plan that best aligns with your specific circumstances. No single strategy is perfect, but a well-informed decision can help you better manage your finances throughout your retirement years.