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Everyone wants more security for their retirement savings, and outside of Social Security, the most reliable way to achieve this is often the much-maligned annuity. The main issue for many people is losing control of a large chunk of their retirement pot—they simply don’t like the idea. But what if you could get some of the security an annuity provides without giving up control of your cash?
No solution is perfect, but this idea might be of interest. I recently read about the perpetual withdrawal rate, a strategy that back-testing has shown will never run out of money. You could mentally set aside a portion of your portfolio and use the 2.5% perpetual withdrawal rate to act as a substitute for an annuity, possibly to fund your essential expenses. You would still have full control and full market upside, but with much more confidence in the money’s ability to last your lifetime.
You could then use a guardrail strategy for the balance of your portfolio to fund your wants. Research has shown this flexible approach can support a higher withdrawal rate than the original 4% rule. The result would be a portion of near-guaranteed income combined with a higher, more flexible withdrawal rate for your discretionary spending.
How would this work with the commonly used million-dollar portfolio example?
Imagine you needed an extra $10,000 of essential income beyond your Social Security payments. You could apply the Perpetual Withdrawal Rate (PWR) to $400,000 of your portfolio to generate this secure income stream.
Then, with the remaining $600,000, you could apply a dynamic withdrawal strategy, starting with a 4.5% withdrawal rate. This would provide you with a discretionary income of $27,000.
Combining these two amounts gives you a total of $37,000, or 3.7% of your original portfolio. While this is a small reduction on the traditional 4% rule, it is a mental accounting method that could allow you to sleep soundly during market turmoil without compromising future growth or surrendering control of your cash.
This dual-bucket strategy might offer a solution to the retirement income problem for some, providing psychological security while keeping full portfolio control. By separating needs from wants, you gain confidence during volatility without sacrificing flexibility or growth. The 2.5% foundation is historically durable, while dynamic discretionary spending captures additional returns. This idea could provide greater peace of mind than traditional strategies with more flexibility than annuities…. although I could be just talking out my a*s. Anyone got some thoughts?
Since 2010 the average annual price of the S&P 500 has increased from $948 to $5,981. That’s a remarkable increase and I have a concern that we have become complacent. “Investors’ appetite for risk may be what Gerald Wilde, a psychologist who died in 2019, called “homeostatic”: When the environment comes to feel safer, as it does in a long bull market, people’s behavior becomes riskier. (“You will probably drive faster in a big SUV than in a little tin can of a car,” he once told me.)” – Jason Zweig at the WSJ. In practice, this may occur as altering one’s allocation to favor a greater percentage of stocks.
If my portfolio was of a traditional make-up, without fixed income and bond ladders plus a large dollop of cash, I would be derisking in the current market. But as it’s not, I don’t worry.
Have you looked at Bill Bengen’s work or website? He’s he author of the 4% rule. He has a new book just out last month called “A Richer
Retirement, Supercharging the 4% Rule to Spend More and Enjoy More?
I was lucky enough to catch a podcast with him this week, Wade Pfau Retire with Style podcast 195, They also had him on a live Q & A for an hour this past Thursday which I see is on YouTube as well. Both were worth my time . if you look for him on YouTube hes making the rounds to promote his new book.
He thinks the 4% rule is likely too conservative and its more like a 5.5% rule perhaps with some guardrails around it for inflation and bear markets where one might adjust spending.
In the podcasts/ Q&A he says his most recent focus is on how portfolios with a higher stock allocation have preformed better over time. He seemed to be favoring a 65% stock allocation.
His website is pretty cool with all the tables and worksheets from the book to try and determine your own personal “SAFEMAX” withdrawal strategy.
I’ve read a lot about his work through other sites and articles. I never realized he had a dedicated site; thanks for the info.