Why Your Withdrawal Rate and Bond Ladder are Key to Outsmarting Anxiety

If you’re worried about spending too much money in retirement, the constant stream of financial news isn't helping. Instead of focusing on the headlines, you need to focus on just three concrete numbers that give you control and confidence.

Let’s break down the three numbers that will allow you to spend comfortably in retirement. You can also watch my YouTube video on this topic here.

1. Your Withdrawal Rate Percentage

This is the most important and most referenced number. It tells you how much you are spending from your assets each year, relative to your total portfolio size.

Withdrawal Rate=Total Investment Portfolio SizeAnnual Spending from Assets​

• Numerator (Spending): This includes everything you take out of your 401(k)s, IRAs, Roth accounts, and brokerage accounts.

• Denominator (Portfolio Size): This includes all your investment accounts. (We generally don't include the value of your primary home since you won't liquidate that equity until much later in your plan.)

The 4% Rule Context

You've likely heard of the 4% Rule. If your computed withdrawal rate is at or below 4%, you are generally on track. This number represents the minimum amount you could have spent in the worst historical market environments (like the Great Depression or 1970s stagflation) without running out of money.

• The Reality of Early Retirement: Almost everyone exceeds 4% early in retirement. You are going on trips, remodeling your house, and doing all sorts of fun things you didn't have time for while working. Don't panic if you are over 4% or 5% initially.

• The Mitigation: By the time other guaranteed income sources—like Social Security, pensions, or rental income—turn on, your withdrawal rate from your investment portfolio will likely drop back down below 4% anyway. If you are projected to be consistently over 5% even after all your income sources have started, then it is something that needs immediate attention.

2. Your Guaranteed Income Sources

This is the key factor that mitigates the initial high withdrawal rate and provides long-term stability. You need a solid handle on when these revenue streams start.

• When Income Turns On: This includes the start date and amount of Social Security, any pensions, and when you expect rental income (e.g., if your mortgage is paid off on a rental property).

• The Solution to High Initial Spending: By the time Social Security and pensions begin, they often cover a large portion of your core expenses. This lessens your reliance on portfolio withdrawals, making your overall plan much safer.

3. The Number of Rungs in Your Bond Ladder

This conceptual number is your "ladder to safety." It defines how many years of cash and fixed income you have set aside to protect your portfolio from sequence of return risk.

• The Goal: You purchase bonds (or similar short-term fixed-income products like CDs) that mature every year. This bridges the gap between when you retire and when your other income sources turn on, providing safe cash that you can spend.

• Risk Mitigation: If the market declines precipitously (like in 2008 or the tech crash), you spend the money from the safe bond ladder instead of selling depressed stocks. In the years the market goes up, you rebalance by selling some stocks to buy another rung on your ladder, keeping it fully stocked.

• The Length: The size of your ladder depends on your risk tolerance and experience. If you watched the Great Financial Crisis closely, you likely have scar tissue and may want a longer ladder (e.g., five to seven years). Conservative investors often want a longer ladder to ensure they ride out the longest bear markets on record.

Conclusion: Gaining Confidence

By focusing on these three numbers—your actual withdrawal rate, the timing of your income sources, and the length of your bond ladder—you can move past the anxiety of market swings and achieve confidence in your retirement plan.

At Barrett FP LLC, we offer expert financial planning on an hourly basis, focused entirely on helping you achieve your goals.

Learn more about how we can help you build your custom withdrawal strategy and see if we’re a good fit.