Welcome back to our retirement series!
In retirement, your portfolio is your paycheck. But unlike a salary, you get to decide how much to withdraw each year. Get it wrong, and you risk running out of money too soon. Get it right, and you live comfortably without worry.
So, do you take out the same inflation-adjusted amount every year? Or do you adjust based on how your investments are doing?
You see, most retirement plans fail because they are rigid. They assume you are a robot who withdraws the exact same inflation-adjusted amount every year, regardless of whether the stock market is booming or crashing.
But you aren’t a robot. You can adjust. You can tighten your belt when times are tough and splash out when times are good. This ability to adapt is your “flexibility superpower.”
In this post, we are going to dive deep into Fixed and Dynamic Withdrawal Strategies. We will analyse findings from a research paper titled “Safe Withdrawal Rates in India: Balancing Portfolio Sustainability and Flexibility” to show you how being flexible can actually help you withdraw more money and enjoy a richer retirement.
Let’s dive in!
Estimated read time: 5 minutes and 06 seconds
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Buckle up. Here we go!
Before we get to the cool dynamic stuff, let’s look at the baseline. This is what most people do by default.
1. The Fixed Withdrawal Strategy
This is the base case, the simplest, most widely known approach.
You decide on a withdrawal amount at the start of retirement (say ₹6 lakhs a year from a ₹2 crore corpus, a 3% safe withdrawal rate). Then you increase this amount every year by inflation, regardless of how your portfolio performs.
So if inflation is 6%, you’ll withdraw ₹6.36 lakh in Year 2, ₹6.74 lakh in Year 3, and so on.
Curious what your safe withdrawal rate would be? Try Vrid’s Retirement Calculator to test your own numbers.
Advantages:
- Predictable cash flows: You know exactly how much you’ll get every year.
- Simple to follow: Once set, you don’t need to make adjustments.
- Stable lifestyle: Ideal if you value consistency over flexibility.
Disadvantages:
- Doesn’t adapt to markets: If markets crash early, your portfolio can deplete faster.
- Can underspend: If your portfolio performs really well, you may end up leaving too much unspent.
- Too rigid: It assumes your expenses always rise with inflation, which isn’t always true.
According to the research paper:
This strategy provided the lowest starting SWRs but the highest ending portfolio value.
In short, safe but conservative. Great for those who want to leave an inheritance or prioritise stability.
2. Forgoing Inflation Adjustments After Portfolio Loss
Now, this one’s smart and quite practical.
You start just like the fixed method (say ₹6 lakh from a ₹2 crore corpus). But if your portfolio falls in a given year, you skip the inflation adjustment for the next year.
You don’t reduce your withdrawal; you simply don’t increase it until the portfolio recovers.
Example: Let’s say your ₹2 crore portfolio falls 15% in Year 1 to ₹1.7 crore.
Inflation is 6%, so normally you’d withdraw ₹6.36 lakh in Year 2 (3% SWR). But under this rule, you continue withdrawing ₹6 lakh.
That ₹36,000 difference may seem small, but over time, it compounds, giving your portfolio some breathing space to recover.
Advantages:
- Protects the portfolio during bad markets.
- Simple to apply, just skip inflation in down years.
- Improves sustainability without major lifestyle sacrifice.
Disadvantages:
- Slight lifestyle hit in bad years.
- Withdrawals can lag inflation if markets stay weak for long.
According to the research paper:
This method provided higher lifetime spending than the fixed approach, while keeping volatility moderate.
It worked best for balanced portfolios (20–40% equity) and helped extend portfolio life without much complexity.
It’s a great middle ground; flexible yet conservative.
3. The Guardrails Strategy
This one’s for retirees who want flexibility and control.
Originally proposed by Guyton and Klinger (2006), the guardrails strategy dynamically adjusts your withdrawals depending on how your portfolio performs, within a band or “guardrail.”
How It Works:
- You start with a withdrawal rate (say 3%).
- Set two guardrails, say 20% up or down from your initial rate.
- If your new withdrawal rate (based on portfolio value) falls below the lower guardrail (e.g., 2.6%), you increase spending by 10%.
- If it rises above the upper guardrail (e.g., 3.6%), you reduce spending by 10%.
Example: You start with ₹2 crore, withdraw ₹6 lakh (3% SWR).
Next year, your portfolio grows to ₹2.8 crore.
Your inflation-adjusted withdrawal (₹6.36 lakh) is now only 2.3% of your corpus, below the lower guardrail, so you increase your withdrawal by 10% to ₹6.9 lakh.
If instead the portfolio fell to ₹1.4 crore, that same ₹6.36 lakh withdrawal becomes 4.5% of the corpus, above the upper guardrail, so you cut your withdrawal by 10% to ₹5.7 lakh.
Advantages:
- Adapts perfectly to market conditions.
- Let’s you spend more when times are good.
- Reduces withdrawals in bad years to preserve longevity.
- Delivers the highest starting SWR (as per research).
Disadvantages:
- Volatile cash flows: Spending may fluctuate a lot year to year.
- Requires discipline and monitoring.
- Can be emotionally tough: Cutting expenses after market crashes is never easy.
According to the research paper:
Guardrails strategy provided the highest lifetime spending, especially for equity-heavy portfolios (60–80%). But also had the highest cash flow volatility.
Best suited for those seeking financial freedom and flexibility, not just stability.
If you can emotionally handle some variability, this can significantly increase your sustainable withdrawals.
4. The Declining Spending Strategy
This strategy is based on a simple observation that spending tends to decline as we age.
People often spend more in the early years (travel, lifestyle, hobbies) and less in later years (as health limits activity and priorities change).
The study assumed a 2% annual decline in spending, meaning you gradually withdraw less every year (after adjusting for inflation).
Example: If you start by withdrawing ₹6 lakh, you take ₹5.88 lakh in Year 2, ₹5.76 lakh in Year 3, and so on.
Advantages:
- Reflects real-life spending patterns.
- Improves portfolio longevity by reducing late-life withdrawals.
- Allows higher initial withdrawals (front-loading spending).
Disadvantages:
- Reduces long-term comfort: Later years could feel tighter if healthcare costs rise.
- Rigid formula; doesn’t adapt to markets.
According to the research paper:
This approach offered higher starting SWRs (because of early higher withdrawals) but the lowest lifetime spending. It’s best for retirees who want to enjoy more in the early years and are comfortable with lower spending later.
Which Withdrawal Strategy Should You Use?
Now for the million-dollar question: Which one should you choose? The research paper gives us some fascinating data comparing these methods over a 30-year period.
Here is a simple guide based on your goals:
Goal 1: “I want to spend as much as possible while I’m alive.”
Go for Guardrails or Forgoing Inflation. If your goal is to squeeze every drop of juice out of your retirement lemon, go for the Guardrails approach. It allows for the highest starting income and adjusts to give you more when the market is up.
The “Skip” (Forgoing Inflation) method is a great middle ground. It offers higher lifetime spending than the fixed strategy but is less volatile than Guardrails.
Goal 2: “I want a stable, predictable income. I hate surprises.”
Go for Fixed Withdrawal (Baseline). If you can’t handle the idea of your monthly income dropping because the stock market fell, stick to the fixed strategy.
But be warned: to make this safe, you must start with a lower initial withdrawal rate (a bigger corpus).
Goal 3: “I want to leave a huge inheritance for my kids.”
Go for Fixed Real Withdrawal or Declining Spending. Surprisingly, the rigid strategies often end up leaving the most money behind. Why? Because they don’t ramp up spending when the market booms. They let the surplus pile up.
The “Declining Spending” strategy also leaves a large corpus because you drastically cut your own spending in later years.
And the Guardrails strategy leaves the least money behind because it encourages you to spend the surplus while you are alive.
Tax Matters: The Budget 2025 Impact
If your taxable retirement income is below ₹12 lakhs annually, you pay zero tax on FD interest under Budget 2025. This dramatically improves all these strategies!
For someone with ₹3 crores:
- All strategies keep you under the ₹12 lakh threshold
- Your effective SWR increases by 0.5-0.8% compared to the 30% tax scenario
- This is a game-changer for middle-class Indian retirees!
Final Thoughts
Dynamic withdrawal strategies are not about complicating your retirement; they’re about adapting to life.
The research shows that in India’s high-inflation, high-volatility environment:
- Rigid rules like the 4% rule can fail.
- Flexibility improves outcomes.
- And a 3%–3.5% dynamic withdrawal rate offers the best balance between sustainability and lifestyle.
Ready to put this into practice? Use Vrid’s free Retirement Calculator to find your optimal withdrawal rate and see how long your corpus will last.
The trick is to stay flexible, not fearful.
If you adjust when the market demands and review once a year, you can make your money and your retirement last beautifully.
Share these insights with your buddies.
Still Curious?
If you are like us, who likes to analyse a little more or check out content in different formats, well you are in luck. Below you can find some suitable content we found.
SSRN – Boosting Retirement Income through Dynamic Withdrawals (Research Paper)
Note: We don’t have any affiliation with them. We are sharing links only for educational purposes. The opinions expressed by them belong solely to them and do not reflect the views of Vrid.
