From Savings to Income

Charts & Tables
Table 1. Utility Scores for Six Selected Strategy/Drawdown Combinations
Table 2. Best Drawdown Percentages Vary
There is no single winning strategy for retirement drawdowns. But there are ways to construct a balance between needlessly underspending and threatening long-term security.

More than one in three Americans is aged between 45 and 74 and is either in retirement or thinking about it. For most of these 100 million people, the days of pension plans are all but gone. Fewer than one in five workers is covered by a defined benefit retirement plan. Meanwhile, the 401(k) experiment is well underway. These defined contribution plans make individuals responsible for financing and managing their own retirements.

Given the massive cohort involved, informed decisions about retirement financing will be essential not only to retirees, but to the health of the U.S. economy. The study is intended to determine whether there is a retirement drawdown strategy that strikes a balance between prematurely exhausting savings and needlessly underspending during retirement. It is intended to help those nearing retirement consider how to effectively draw income from their savings after they have left the workforce. 

Beyond the 4 Percent Rule

In 1994, William Bengen developed the 4 Percent Rule for drawing down assets in retirement: Calculate 4 percent of the nest egg in the first year of retirement and live off that amount for every subsequent year (adjusting for inflation). Bengen found that this strategy, based on simulated historical portfolios that had invested 50/50 in stocks and bonds, would allow retirement savings to last at least 30 years. 

The 4 Percent Rule continues to be a benchmark today. For a back-of-the-napkin estimate of how much is needed for retirement, it’s not bad. But no simple financial rule can take into account all of the complexities of real life.

The study moves beyond the 4 Percent Rule and examines an array of retirement drawdown strategies. These strategies are meant to respond to the range of financial risks and opportunities that retirees may face.

The analysis focuses strictly on strategies for drawing down retirement savings. It is not an asset allocation study. A 50/50 stock/bond allocation is assumed as a framework for the analysis. Asset allocation and annuity income will be the subject of future AIER research.

AIER Retirement Finance Model

Our analysis compares retirement drawdown strategies that fall into three broad categories: constant dollar (withdrawing a fixed amount of the portfolio annually), constant percentage (withdrawing a fixed percentage of the portfolio annually), and increasing percentage (adjusting the drawdown percentage upward throughout retirement). The strategies are summarized on page 4.

For each strategy, we apply initial drawdown amounts ranging from 2 percent to 7.5 percent. Then we examine the performance that would have resulted from actual market returns that occurred between 1928 and 2013. We seek to determine which combination of drawdown strategy and initial withdrawal amount is best under a spectrum of investment conditions. 

Each of these simulated retirement combinations results in a stream of income over the retirement period, from which we calculate a utility score.  The score reflects both average annual spending and the minimum annual spending that strategy allows.

We examined eight drawdown strategies and 12 different initial annual percentage withdrawals. The resulting 96 strategy/drawdown combinations achieve higher utility scores when they allow for high and stable annual spending. Utility scores are lower when the portfolio is prematurely exhausted or when retirement spending is too low.

An increasing-percentage strategy that uses a 2 percent initial drawdown, for example, will produce different annual retirement income in different markets. The utility model compares results for this strategy/drawdown combination across hundreds of different investment environments to calculate its utility score. These results are compared with utility scores calculated for the same strategy using a 3 percent drawdown amount, and so on. To further examine each combination, the analysis looks at “worse case” scenarios, which combine longer than average retirement lengths with poor investment conditions.

The utility scores illustrate various trade-offs.  For instance, an inflation-adjusted drawdown percentage starting at 4.5 percent offers the highest average utility. But under the worst-case scenario, this strategy offers significantly lower utility than the same strategy that starts with a 3 percent drawdown.

Across all historical investment conditions, a 4.5 percent inflation-adjusted percentage drawdown results in a range of utility scores from 5.41 to 13.20.

Assuming starting savings of $1 million, the utility score of 13.20 is derived from average annual retirement spending of $87,100 and minimum annual spending of $44,900. Such levels of spending can only be accomplished during periods of very high returns as occurred during retirements that began in July 1932. The utility score of 5.41, however, results from average annual retirement spending of $33,900 and minimum annual spending of $20,200. These levels are lower as a result of poor returns during the retirement period that began in November 1965.

An average utility score is calculated by averaging the scores across each of the 553 historical rolling return periods between 1928 and 2013. As Table 1 shows, the average utility score for this particular strategy/drawdown was 8.19. During longer-than-average retirements with poor returns, however, the utility score was only 4.17.

This divergence in scores exemplifies a tradeoff that must be considered. Throughout our report, we provide average and worst case utility scores for the various strategy/drawdown combinations.

Table 1 provides utility scores for several selected strategies and drawdown percentages. It shows the average scores and those in the worst case scenario for each combination. How a person choses among these strategies depends on individual preference. If you anticipate great longevity and uncertain markets, look closely at worst-case scores.  If you are more risk tolerant, consider average utility scores.


Our analysis offers some guiding principles that retirees can use when building a retirement drawdown strategy.

There is no hard and fast rule. No obvious winning strategy can be found across the spectrum of historical market returns and inflation. The success of a retirement drawdown strategy is dependent on investment returns that have been historically erratic. Randomness and timing play a huge role in determining which strategy offers the best simulated outcome. Table 2 looks at selected historical retirement dates and shows how the best sustainable rate of withdrawal fluctuates depending on indeterminate market conditions.

Early retirement behavior matters most. The first five to 10 years of retirement have an outsized impact on long-term success. Spending less during these years offers a better likelihood of positive outcomes over the entire retirement horizon.

A flexible drawdown strategy leads to better retirement outcomes. The best simulated results came from strategies that increase the drawdown percentage later in retirement.

3 to 5 percent is a prudent starting point. Initial drawdowns below 3 percent should be considered only for the most risk-averse retirees or when future returns are expected to be well below the historical average. Initial drawdowns above 5 percent should be considered only if risk tolerance is high and the strategy chosen responds to market drops.  

Where Do I Start?

Retirees face four major retirement finance risks in determining a drawdown strategy: the uncertainty of lifespans, fluctuating market returns, potential inflation, and unforeseen personal expenditures. The factors influencing these risks and their effect on retirement outcomes are largely out of the control of individuals. For example, a retiree from 1979 had the good fortune of excellent market returns during the 1980s and 1990s. A retiree from 1964, on the other hand, dealt with low returns and inflation through much of her early retirement. 

A retiree can control the amount she draws annually, the strategy for adjusting those withdrawals, whether to annuitize assets, and how to invest the nest egg.

There is no magic bullet that foretells the ideal savings drawdown strategy. The study shows that retirees should develop a plan that considers good and bad markets and adjusts expectations and strategies over time. The study equips people with the information needed to begin thinking about that process.

The 8 Drawdown Strategies:

1 Constant dollar, inflation adjusted: This strategy starts with a constant dollar amount and adjusts it annually for inflation. This strategy is not adaptable to market returns. Rather, it aims for a sustainable drawdown level that can leave the retiree with an unwavering stream of income throughout retirement. This is the strategy employed under the 4 Percent Rule.

2 Constant percentage: This strategy withdraws a constant percentage of the portfolio at the beginning of every year. It allows for more adaptability to market movements and is less likely to exhaust assets. When the portfolio decreases in value, the drawdown amount decreases similarly. This strategy suffers from a higher rate of drawdown variability.

3 Smoothed percentage: This strategy is similar to the constant percentage strategy, except it uses the average of the previous three years of drawdowns to smooth consumption. If the previous three years’ drawdown averaged $40,000 and the constant percentage amount would be $50,000, the smoothed amount would $45,000.

4 Constant-percentage ceiling: This strategy is similar to the constant percentage strategy, except it caps the drawdown in any given year to the original drawdown amount, adjusted for inflation. Strong financial returns are not met with increased drawdown amounts under this strategy.

5 Constant-percentage floor: This strategy is the same as the constant percentage ceiling strategy, but a floor is implemented instead of a ceiling. This strategy offers higher upside, but has the potential to exhaust savings when the floor is set too high.

6 Inflation-adjusted percentage: This strategy starts with a percentage to draw down and adjusts that percentage with inflation. This will adjust the percentage upward during times of positive inflation. The strategy assumes that as the retiree ages, a higher-percentage drawdown is more acceptable. This strategy is adaptable to market conditions, but can be susceptible to drawdown variability.

7 Increasing percentage: This strategy starts by drawing a certain percentage of the portfolio and increasing that percentage by 5 percent each year. For example, draw 3 percent the first year, 3.15 percent the second year, 3.3075 percent the third year, etc. The drawdown percentage is capped at 10 percent.

8 Required minimum distribution percentage (RMD): This strategy uses the IRS’s required minimum distributions to calculate an annual drawdown percentage. The first five years of retirement use an inflation-adjusted constant-dollar strategy, and then the RMD assumptions are used from ages 70-plus.

Click here to read the full Research Study.


Charts & Tables
Table 1. Utility Scores for Six Selected Strategy/Drawdown Combinations
Table 2. Best Drawdown Percentages Vary

Luke F. Delorme

Luke F. Delorme is Director of Financial Planning for American Investment Services. Articles do not constitute personal investment advice. Please seek the advice of a professional before implementing any financial decision. Luke can be reached at

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