Retirement planning through dynamic withdrawal strategies

Dynamic withdrawal strategies aim to solve these problems. Instead of following a rigid formula, withdrawals rise or fall depending on how the portfolio performs

Retirement has always been a thorny issue, particularly during the distribution phase i.e., the pension or annuity to be consumed from the corpus. The ‘4 per cent rule’ remained for decades as a thumb rule, relied mostly in the US, suggesting that 4 per cent of the initial retirement portfolio value (adjusted for inflation) could sustain for a 30-year retirement. But, with increased volatility in both market rates and inflationary trends, that traditional athematic is being questioned.

A recent work, Retirement - dynamic withdrawal strategies by Ravi Saraogi, CFA, brings this global body of work into the Indian context. Using data from Indian equity, debt, and inflation since 2000, the study runs 10,000 Monte Carlo simulations to compare more than ten withdrawal approaches—ranging from traditional static rules to modern adaptive strategies. The results are both insightful and practical for anyone looking to secure income during retirement.

The work mainly concentrates on the distinction and the results between static and dynamic strategies. In a static strategy like the inflation-adjusted 3.2 per cent baseline examined in the report, the retiree withdraws a fixed amount each year, rising with inflation regardless of portfolio performance.

While this guarantees predictable income, it exposes retirees to the risk of depleting their corpus if markets underperform. It can also lead to unintended “under-consumption,” where retirees leave behind substantial wealth simply because their withdrawals never adapt to favorable markets.

Dynamic withdrawal strategies aim to solve these problems. Instead of following a rigid formula, withdrawals rise or fall depending on how the portfolio performs. For instance, the “fixed percentage” method withdraws a constant fraction of the current balance, ensuring the portfolio never runs out—though income can swing dramatically.

Others, like the “endowment rule,” smooth income by averaging portfolio values over several years. The “guardrails” approach, popularised by Guyton and Klinger, sets thresholds for income adjustments, cutting back when portfolios shrink too much but granting raises after strong gains.

The key findings from the Indian study highlights several important findings for retirees.

Sustainability: Most adaptive approaches preserved portfolios better in bad markets compared to the static baseline, showing an improvement through dynamic strategies. For example, the fixed-percentage and guardrails methods maintained much higher minimum corpus levels, reducing the chance of outright failure.

Trade-offs:The biggest benefit of dynamic rules is portfolio longevity, but the trade-off cost of income volatility. Retirees adopting these methods must be prepared for years when their monthly cash flow is noticeably lower.

Irrelevance of 4 per cent rule: Earlier studies by Saraogi (2022) and Raju & Saraogi (2024) already suggested that India’s safe withdrawal rate lies closer to 3–3.5 per cent, reflecting higher inflation and more volatile returns. The new report reinforces that retirees should not rely on the U.S. benchmark.

Bespoke strategies: Different strategies suit different retiree profiles. Every strategy involves compromises depending upon personal risk tolerance and lifestyle needs. The study categorised retirees as: Optimistic - those who prioritise higher spendingmay find guardrails, ratchetingor endowment-based rules more appealing.

Neutral - those seeking balance between income and safetyfare well under the Kitces ratchet or the baseline rule.

Defensive - those focused on stability and avoiding cutsare best served by the baseline or Kitces approaches, even if these leave money on the table.

Arguably, the report’s most valuable contribution is the depiction of RetireAbility Index, which combines over twenty evaluation metrics into a single score. The traditional measure of whether a portfolio runs out i.e., failure rates, it looks at four dimensions: spending (how much income the retiree can draw), stability (volatility of annual income), savings (how much wealth remains at the end) and sustainability (whether the corpus lasts without severe cuts).

This holistic approach allows retirees and advisors to match strategies with real-world preferences. Some may want smoother income, others may aim to maximise lifetime spending, while still others may care most about leaving a legacy. Inflation tends to run higher, fixed-income instruments behave differently, and taxation rules complicate portfolio planning.

The study underscores that Indian retirees face a very different landscape from their Western counterparts. Instead, retirees should consider strategies that are flexible and localised. For instance, the endowment hybrid, blending steady inflation adjustments with percentage-based withdrawals, emerged as a strong compromise in the Indian simulations.

Meanwhile, guardrails offered upside potential but carried the emotional challenge of frequent spending cuts. And while the bucket approach is popular with advisors for its psychological appeal, the study found it did little to protect wealth in worst-case scenarios.

While the study is one of the first comprehensive efforts to evaluate adaptive income strategies using Indian data, dynamic withdrawals can meaningfully improve retirement outcomes but only if the retirees accept income variability and choose a strategy aligned with their comfort level.

(The author is a partner with “Wealocity Analytics”, a SEBI registered Research Analyst firm and could be reached at [email protected])