The Best Strategies for Consistent Retirement Spending

If you ask an economist about the ideal model for retirement spending, she’d probably tell you that most people prefer to smooth consumption (that is, spending the same amount) across their lifetimes instead of making dramatic changes from year to year.

This mindset doesn’t hold for every person, but it does have some empirical support.

Research from Alicia Munnell at Boston College’s Center for Retirement Research indicates that many retirees, particularly those with higher asset levels, tend to maintain relatively consistent spending over time.

In our recent annual study on safe withdrawal rates, my colleagues Tao Guo, Jason Kephart, Christine Benz, and I examined a total of eight flexible spending strategies, all of which allow for higher withdrawal rates than the well-known “4% rule” originally developed by Bill Bengen. But each of these methods has different pros and cons, and the “right” approach ultimately depends on what’s important to you as an individual.

In this article, I’ll discuss the best strategies to use if you’d rather keep your spending relatively stable from year to year. (I previously covered strategies that can help maximize your legacy, boost your starting safe withdrawal rate, and generate the highest lifetime spending.)

The Best Strategies for Keeping Retirement Spending Consistent

Four key strategies can help you avoid overly bumpy spending patterns during retirement, as shown in the graph below.

For each of the strategies we tested, we used forward-looking return and volatility assumptions to test 1,000 hypothetical return patterns for a portfolio made up of 40% stocks and 60% bonds over a 30-year period. We then used these return patterns to find the highest starting withdrawal rate that ended with a positive portfolio balance in at least 90% of the trials. We looked at the standard deviation of cash flows in the 30^th year as a proxy for potential volatility in spending. Five of the strategies (to the right of the red line) allowed for higher spending amounts but with more volatility, but the other four (to the left of the red line) helped keep spending more stable.

Base Case: Lowest Variation in Year 30 Cash Flows

How it works: The “base case” assumes the retiree uses a given percentage (in this year’s study, 3.9%) of the portfolio value to calculate the first-year withdrawal amount and then adjusts that amount each year for inflation. The dollar value of withdrawals remains flat each year in inflation-adjusted terms. A retiree following this method would still spend the same amount even if the portfolio enjoyed a series of above-average or below-average returns. Spending with this method closely approximates Social Security because annual spending is the same every year, aside from an annual cost-of-living adjustment.

Example: In the first year of retirement, Alice withdraws 3.9% of her $1 million portfolio, or $39,000. Inflation for that year turns out to be 2.5%, so she increases the spending amount by $975, for total spending of $39,975 in the second year. She continues to adjust each year’s spending amount based on inflation for the trailing 12-month period.

Actual Spending: Second-Lowest Variation in Year 30 Cash Flows

How it works: We also tested a strategy that incorporates the average decline in spending that occurs over the retirement lifecycle. Research from the Employee Benefit Research Institute found that inflation-adjusted household spending has historically fallen by 19% from age 65 to 75, 34% from age 65 to 85, and 52% from age 65 to 95. For the purpose of our research, we streamlined these assumptions to reflect a steady decline in inflation-adjusted household spending of 2% per year throughout retirement. This number is also in line with 2021 research from T. Rowe Price.

Spending with this method does change over time, but by a small and predictable amount.

Example: In the first year of retirement, Bob withdraws 5% of his $1 million portfolio, or $50,000. Inflation for that year turns out to be 2.5%, so he calculates inflation-adjusted spending of $51,250 for the second year and then reduces that amount by 2%, ending up with $50,225. He continues to adjust the spending amount for inflation every year and then reduces the adjusted amount by 2%. In effect, this approach generally means annual spending still increases, but by less than inflation.

Forgo Inflation Adjustment Following Annual Portfolio Loss: Third-Lowest Variation in Year 30 Cash Flows

How it works: This method begins with the base case of fixed real withdrawals throughout a 30-year time horizon. However, to preserve assets following down markets, the retiree skips the inflation adjustment for the year following a year in which the portfolio has declined in value. This might seem like a modest step, but the cuts in real spending, while small, are cumulative. That is, the effects of such cuts ripple into the future, as these changes permanently reduce the retiree’s spending pattern.

This method doesn’t lead to dramatic variation in cash flows because the spending amount only changes in years following a portfolio decline, and skipping the inflation adjustment generally involves making minor adjustments.

Example: In the first year of retirement, Claire withdraws 4.3% of her $1 million portfolio, or $43,000. After accounting for the withdrawal and performance on the underlying holdings, her portfolio is down to about $995,300 by the end of the year. Although inflation was 2.7%, she skips the inflation adjustment and withdraws $43,000 again in the second year. She continues to keep track of her portfolio’s value at the end of each year and doesn’t adjust her withdrawals for inflation whenever the portfolio value declines.

Probability-Based Guardrails: Fourth-Lowest Variation in Year 30 Cash Flows

How it works: This method involves continuous testing and course correction, which in turn helps support an above-average starting safe withdrawal percentage. By reassessing the spending plan’s probability of success on a regular basis and making adjustments as needed, retirees can spend more than they’d be able to with a more static strategy.

We tested this approach by recalculating the probability of success after each year of the test period. If the probability of success dropped to 75%, we reduced the proposed spending amount for the year by 10%. If a strong market environment boosted the probability of success to 95%, we increased the proposed spending amount for the year by 10%. Because this method sometimes led to extremely high spending amounts following a period of above-average portfolio returns, we capped the annual spending amounts at 120% of initial spending, adjusted for inflation.

Example: In the first year of retirement, Diego withdraws 5.1% of his $1 million portfolio, or $51,000. He adjusts this withdrawal amount for inflation and then recalculates the probability of success each year using an online tool. After several years of favorable market returns and modest inflation, his probability of success jumps to 98%. Because that’s higher than the upper limit, he bumps up his annual inflation-adjusted spending amount by 10%.

Other Benefits of These Four Methods

Most of these methods are inherently conservative because of their emphasis on keeping annual spending relatively stable from year to year. As a result, three of the four—the base case, actual spending, and forgo inflation adjustment methods—end up with hefty portfolio balances at the end of a projected 30-year period. That might be appealing for retirees who want to leave money behind to loved ones or charity. (The probability-based guardrails method doesn’t excel on this metric because it continuously fine-tunes spending, which allows retirees to spend more during their own lifetimes.) Three of the methods also allow for higher starting safe withdrawal rates compared with the base case of 3.9%.

Drawbacks of Spending Methods That Minimize Spending Volatility

But there are some trade-offs. While some of the methods covered in my previous articles—namely the constant percentage and endowment methods—allow for starting withdrawal rates as high as 5.7%, keeping cash flows stable means there’s less room to make bigger withdrawals at the beginning of retirement. In addition, all of the methods highlighted here (except the base case) still involve some changes to spending over time.