Retirement Withdrawal Rate
Controls how the base case draws retirement income from the portfolio. Choose Rate mode (apply a percentage to portfolio value each year) or Target Income mode (set a dollar target and let the model compute the gap after other income sources). Rate mode uses the widely-cited 4% rule as a starting point. Target Income mode fills the gap tier by tier based on a draw order you configure.
How it works
Stratum offers two ways to model base-case retirement withdrawals. Rate mode applies a sustainable withdrawal rate (SWR) to total portfolio value each year in retirement — the classic 4% rule approach. Target Income mode takes a different starting point: the advisor sets an annual dollar target, the model subtracts non-asset income sources and expected RMDs, and draws the remaining gap from asset pools in a configurable priority order (tiers). Both modes only apply to the base case. If the Structured Withdrawals strategy is active, it supersedes the base withdrawal model entirely for strategic-case projections.
1. Select Withdrawal Mode
Choose Rate or Target Income in the Assumptions Panel under Retirement Planning. Rate mode is the default. Target Income mode is appropriate when you know what the client needs to spend and want the model to show how assets are depleted to meet that need year by year.
Example: Rate mode: 4% × $1,500,000 portfolio = $60,000 draw year 1. Target Income mode: $80,000 target − $35,000 SS − $12,000 pension − $8,000 expected RMD = $25,000 gap drawn from assets.2. Rate Mode — Calculate Annual Distribution
Apply the withdrawal rate to total portfolio value at the start of the first retirement year to establish a dollar amount. That dollar amount then inflates each subsequent year at the scenario inflation rate. The percentage is not recalculated against portfolio value in later years — the dollar amount is what inflates.
Year 1 Distribution = Starting Portfolio × Withdrawal Rate. Year N Distribution = Year 1 Distribution × (1 + Inflation Rate) ^ (N-1)
Example: $1,500,000 × 4% = $60,000 year 1. With 2.5% inflation: year 10 = $75,170. Year 20 = $96,006.3. Target Income Mode — Compute the Gap
Each retirement year, the model computes how much income the portfolio needs to supply. It starts with the annual income target, then subtracts non-asset cash-flow income (wages still being earned, Social Security, pensions, supplemental income — using the cash-flow path, which excludes income-only items like churn distributions) and expected RMDs (calculated from beginning-of-year tax-deferred balances via the IRS Uniform Lifetime Table). The remainder is the gap the asset tiers must fill. If all income sources already meet or exceed the target, the gap is zero and no additional draws are made.
Gap = max(0, Target − nonAssetCashFlowIncome − expectedRMDs)
Example: Target $90,000. SS $28,000, pension $15,000, expected RMD $9,000. Gap = max(0, $90,000 − $28,000 − $15,000 − $9,000) = $38,000 drawn from asset tiers.4. Target Income Mode — Fill Gap by Tier
The gap is filled by drawing from asset tiers in priority order. The default order for married households is: Joint Taxable → Client Taxable → Co-Client Taxable → Client Tax-Deferred → Co-Client Tax-Deferred → Client Tax-Free → Co-Client Tax-Free. Single households default to: Taxable → Tax-Deferred → Tax-Free. Draws from each tier are capped at the tier's available balance. If a tier is exhausted before the gap is filled, the model moves to the next tier. Tiers owned by a deceased spouse are skipped. Advisors can drag-and-drop tiers to change the priority order.
Example: $38,000 gap. Tier 1 (Joint Taxable) has $25,000 available — draws $25,000, remaining gap $13,000. Tier 2 (Client Taxable) has $50,000 available — draws $13,000, gap filled.5. Inflation Indexing (Target Income Mode)
When 'Index with inflation' is enabled, the annual income target grows each year at the scenario inflation rate, preserving the real purchasing power of the target. When disabled, the nominal target stays flat — which means the real value of the target declines over time as prices rise.
Indexed Target (Year N) = Base Target × (1 + Inflation Rate) ^ (N − first retirement year)
Example: $80,000 target with 2.5% inflation. Year 5: $88,205. Year 10: $99,491. Year 20: $126,539.6. Portfolio Balance Dynamics (Both Modes)
After each year's distribution (whether from Rate or Target Income mode), remaining balances grow at the assumed investment return rate. The gap between return rate, withdrawal rate, and inflation determines whether the portfolio grows, holds flat, or declines in real terms over retirement.
Year-End Balance = (Beginning Balance − Distributions) × (1 + Return Rate)
Example: Start: $1,500,000. Draw $60,000. 8% return. Year-end: ($1,500,000 − $60,000) × 1.08 = $1,555,200.
Real-world context
Choosing Between Rate and Target Income
Rate mode is useful early in a planning engagement when you know asset levels but haven't pinned down the client's income needs. It answers: 'What income does this portfolio produce at 4%?' Target Income mode is more powerful once you know what the client actually needs to spend. It answers: 'Will this portfolio support $90,000/year — and which accounts get drawn first?' Most advisors start with Rate mode to establish a baseline, then switch to Target Income once income needs are defined.
The 4% Rule (Bengen, 1994)
William Bengen's research established that a 4% inflation-adjusted withdrawal rate could be sustained 95% of the time over 30-year periods using 1926–1976 return data. This assumes 50–75% stock allocation and captures worst-case sequences like retiring in 1929 or 1966. The 4% default in Stratum reflects this benchmark. Lower rates increase sustainability; higher rates increase depletion risk.
IRS reference: Bengen, William P. 'Determining Withdrawal Rates Using Historical Data.' Journal of Financial Planning, 1994
Draw Order and Tax Efficiency
The default tier order (taxable first, tax-deferred second, tax-free last) reflects the conventional wisdom of preserving tax-advantaged accounts for as long as possible. However, it is not always optimal — drawing tax-deferred accounts before large RMD years can reduce lifetime taxes, which is exactly the kind of optimization the Structured Withdrawals strategy handles. The base case draw order is intentionally simple; use Structured Withdrawals when the advisor needs year-by-year control.
Required Minimum Distributions (RMDs)
RMDs are calculated independently via the IRS Uniform Lifetime Table starting at age 73. In Target Income mode, expected RMDs reduce the gap — if RMDs alone exceed the income target, no additional draws are made. In Rate mode, RMDs are processed on top of the percentage-based draw. Large IRA balances can force total distributions well above the planned withdrawal rate, making Roth conversions before RMD age a high-value strategy.
Sequence of Returns Risk
Rate mode is especially vulnerable to sequence of returns risk: poor early returns combined with inflation-growing distributions can erode the portfolio faster than averages suggest. Target Income mode with a gap calculation is slightly more adaptive (if RMDs grow in strong markets, the gap shrinks) but still doesn't reduce draws in down years. For clients who need dynamic withdrawal flexibility, the Structured Withdrawals strategy provides per-year control.
What drives the result
Determines the entire mechanism by which the base case draws retirement income. Rate mode produces a smooth, inflation-growing income stream tied to initial portfolio size. Target Income mode produces a variable draw tied to the income gap each year — draws may be larger or smaller depending on Social Security, pensions, and RMDs in that year.
Rate 4% on $1.5M = $60,000 in year 1 regardless of other income. Target $90,000 with $52,000 in SS + RMDs = $38,000 drawn from assets year 1.
Determines annual income stream from portfolio and implies required portfolio size for a given income level. Lower rates require a larger portfolio for the same income; higher rates increase depletion risk. Interacts critically with investment return and inflation assumptions.
Target $60k/year: 3% rate requires $2M portfolio | 4% rate requires $1.5M | 5% rate requires $1.2M
Sets the gross retirement income goal. Higher targets drive larger asset draws and faster depletion. The model fills the gap after non-asset income and RMDs, so the actual draw depends on Social Security timing, pension amounts, and account balances.
$100,000 target. SS $32,000 + RMD $11,000 = $57,000 already covered. Asset draw = $43,000. Claiming SS at 70 instead of 67 could reduce the asset draw by ~$8,000/year.
When on, the income target grows at the inflation rate each year, preserving purchasing power. When off, the nominal target stays fixed — effectively a declining real target over time. For clients who want to maintain a constant standard of living, this toggle should be on.
$80,000 target with 2.5% inflation, index on: year 10 target = $99,491. Index off: year 10 target stays $80,000 (worth ~$64,000 in today's dollars).
Controls which asset tiers are depleted first to fill the income gap. The default order (taxable before tax-deferred before tax-free) preserves Roth accounts longest. Reordering tiers can show the trade-offs of different depletion sequences — useful for illustrating why Structured Withdrawals improve on the default base case.
Default order: Taxable depleted first → tax-deferred drawn second → Roth preserved. Reordered to draw Roth first: Roth balance exhausted early, larger tax-deferred RMDs in later years.
Net portfolio growth = Return Rate − Withdrawal Rate − Inflation Rate (Rate mode). Positive net growth means the portfolio grows in real terms; zero means it holds flat; negative means gradual depletion. This relationship determines long-run sustainability.
8% return − 4% withdrawal − 2.5% inflation = +1.5% net → Portfolio grows modestly in real terms
Sets the projection horizon. A longer projection requires either a lower withdrawal rate or a larger portfolio to avoid depletion. In Target Income mode, extending life expectancy by 5 years adds 5 more years of draws — a material portfolio impact at any withdrawal level.
30-year projection (to age 95): 4% sustainable | 40-year projection (to age 105): closer to 3.5% sustainable
Assumptions
- Rate mode: distribution amount inflates annually regardless of portfolio performance
- Target Income mode: gap computed fresh each year using beginning-of-year balances and income
- Structured Withdrawals strategy supersedes the base withdrawal model when active
- RMDs are always computed separately via IRS Uniform Lifetime Table — they reduce the gap in Target Income mode but are not directly controlled by the withdrawal rate in Rate mode
- Asset tiers for deceased spouses are automatically excluded from draws
- No draws occur in pre-retirement years under either mode
Limitations
- Rate mode does not adjust for portfolio performance — distributions increase even in down markets
- Target Income mode does not model spending flexibility (no 'guardrails' or floor-and-ceiling adjustments)
- Neither mode accounts for large irregular expenditures (home purchase, medical events)
- Draw order is fixed per the advisor's configuration — no dynamic tax optimization within the base case (use Structured Withdrawals for that)
- Basis ratios and tax treatment within each tier follow account-level assumptions, not intra-year optimization
Related
This page explains how Stratum models this calculation. It is educational material for financial professionals, not tax or legal advice, and tax law changes. Verify current figures against primary IRS sources before relying on them with a client.