The percentage-of-portfolio strategy withdraws a fixed percentage of your current portfolio value each year. Your income rises and falls with markets — you can never fully deplete the portfolio, but your spending may drop significantly during downturns.
Percentage of portfolio is a dynamic spending strategy where the retiree withdraws a set annual percentage of the portfolio's current value, recalculated each year. Unlike the 4% rule which fixes a dollar amount, this approach ties spending directly to portfolio performance.
How It Works
Each year (or month), the withdrawal is recalculated:
Annual Withdrawal = Current Portfolio Value × Withdrawal Rate
For a 4% rate on a $1,000,000 portfolio:
- After a +15% year: Portfolio = $1,150,000, Withdrawal = $46,000
- After a -25% year: Portfolio = $750,000, Withdrawal = $30,000
Key properties:
- Zero depletion risk: You're always taking a fraction of what remains — the portfolio asymptotically approaches zero but never reaches it
- High income volatility: Spending swings directly with market returns, which can make budgeting difficult
- No inflation protection: Unlike the 4% rule, there's no built-in inflation adjustment — real income depends entirely on market performance
- Self-correcting: Withdrawals automatically decrease when the portfolio drops, preserving capital during downturns
Why It Matters for Retirement Planning
This strategy represents a philosophical choice: prioritizing portfolio survival over income stability. It's ideal for retirees who can tolerate variable income and have other stable income sources covering fixed expenses.
The main risk isn't running out of money — it's that income drops to unsustainable levels during prolonged bear markets. A retiree who planned around $40,000/year could find themselves receiving $24,000 after a severe downturn, right when sequence-of-returns risk is most dangerous.
This is why many planners prefer the floor & ceiling strategy, which adds minimum and maximum bounds to the percentage-of-portfolio approach — keeping the anti-depletion benefit while preventing income from dropping below a livable threshold.
A Practical Example
A retiree starts with $1,200,000 and uses a 4% annual withdrawal rate:
| Year | Portfolio Start | Market Return | Withdrawal | Effective Monthly Income |
|---|---|---|---|---|
| 1 | $1,200,000 | +8% | $48,000 | $4,000 |
| 2 | $1,248,000 | -20% | $39,936 | $3,328 |
| 3 | $958,515 | +12% | $38,341 | $3,195 |
| 4 | $1,034,595 | +10% | $41,384 | $3,449 |
Monthly income swings from $4,000 to $3,195 — a 20% drop. The portfolio survives comfortably, but the retiree needs to be prepared for these fluctuations or use a floor & ceiling variant to smooth the ride.
Frequently Asked Questions
- Can you run out of money with a percentage-of-portfolio strategy?
- Mathematically, no — you can never fully deplete the portfolio because you're always taking a percentage of what remains. However, the actual dollar amount can drop to levels far too low to cover basic expenses, which is functionally the same as running out of money.
- What percentage should I withdraw from my portfolio each year?
- Common rates range from 3% to 5% annually. The right rate depends on your portfolio size, other income sources, essential expenses, and risk tolerance. A 4% rate on a $1,000,000 portfolio produces $40,000 in a good year but could drop to $28,000 after a 30% market decline.
- How does percentage of portfolio compare to the 4% rule?
- The 4% rule fixes the initial dollar amount and adjusts for inflation, ignoring portfolio performance. Percentage of portfolio recalculates based on current value each year. The 4% rule risks depletion but provides stable income; percentage of portfolio eliminates depletion risk but creates income volatility.