Sustainable spending is the maximum annual withdrawal your portfolio can support over your full retirement without depletion. Unlike the static 4% rule, it accounts for your specific circumstances — portfolio size, income sources, retirement length, and risk tolerance — and is best estimated using Monte Carlo simulation.
Sustainable spending is the withdrawal level at which a retirement portfolio can fund expenses throughout the entire retirement period with an acceptable probability of success. It's the personalized answer to the question every retiree asks: "How much can I spend?" While rules of thumb like the 4% rule provide a starting point, sustainable spending accounts for individual circumstances that generic rules cannot.
How It Works
Sustainable spending is determined through simulation rather than a simple formula:
- Define your inputs: Portfolio size, asset allocation, retirement duration, expected returns, inflation, guaranteed income, and tax rate
- Run Monte Carlo simulation: Generate thousands of randomized market scenarios
- Find the withdrawal rate that achieves your target success rate (typically 85–95%)
- That rate × your portfolio = your sustainable spending level
Factors that increase sustainable spending:
| Factor | Impact |
|---|---|
| Shorter retirement (20 vs. 30 years) | Higher sustainable rate |
| Pension or Social Security income | Portfolio withdrawals reduced |
| Dynamic spending flexibility | Can start higher, adjust down if needed |
| Higher equity allocation (to a point) | More growth potential |
Factors that decrease sustainable spending:
| Factor | Impact |
|---|---|
| Longer retirement (35+ years) | Must be more conservative |
| No guaranteed income | Portfolio funds everything |
| Fat-tail market risk | More extreme scenarios reduce success |
| Higher confidence requirement | 95% vs. 85% success target requires lower rate |
Why It Matters for Retirement Planning
The gap between generic rules and personalized sustainable spending can be enormous:
- A retiree with a large pension may sustainably spend 5–6% of their portfolio (because the portfolio only covers discretionary expenses)
- A FIRE retiree at 45 with no guaranteed income may need to limit spending to 3–3.5%
- A retiree using Guyton-Klinger dynamic rules can start higher (~4.5–5%) because spending adapts to market conditions
Using the wrong spending level has severe consequences: too high risks portfolio depletion; too low means unnecessarily sacrificing quality of life. Monte Carlo simulation bridges this gap by quantifying the risk at each spending level.
A Practical Example
Three retirees at age 65, all with $1,000,000 in a 60/40 portfolio, targeting 90% success rate over 30 years:
| Retiree | Guaranteed Income | Spending Flexibility | Sustainable Spending | Effective Rate |
|---|---|---|---|---|
| A (no pension, static) | $0 | None (inflation-adjusted) | $38,000/year | 3.8% |
| B (pension, static) | $24,000/year pension | None | $52,000/year total ($28,000 from portfolio) | 2.8% portfolio rate |
| C (no pension, dynamic) | $0 | Guyton-Klinger with 10% cut rule | $44,000/year starting | 4.4% |
Retiree A must be most conservative. Retiree B benefits from guaranteed income reducing portfolio dependence. Retiree C can start higher because dynamic spending provides a safety valve during downturns. All three arrive at different numbers from the same portfolio — proving why personalized simulation matters more than generic rules.
Frequently Asked Questions
- What is sustainable spending in retirement?
- Sustainable spending is the maximum annual withdrawal a portfolio can support over a given retirement period without running out of money. Unlike the 4% rule which uses a single historical number, sustainable spending is personalized to your portfolio size, asset allocation, retirement duration, other income sources, and acceptable probability of success.
- How is sustainable spending different from the 4% rule?
- The 4% rule is a one-size-fits-all guideline based on the worst 30-year period in U.S. history. Sustainable spending is personalized — calculated through Monte Carlo simulation using your specific inputs. It might be higher than 4% (if you have pensions, short horizon) or lower (if you retire early, have no guaranteed income, or want higher confidence).
- How do I find my sustainable spending rate?
- Run a Monte Carlo simulation with your specific portfolio, asset allocation, retirement duration, and income sources. Adjust the withdrawal rate until you reach your target success rate (typically 85-95%). The resulting withdrawal rate is your sustainable spending rate. Reassess every few years as conditions change.