Constant-percentage withdrawals: the strategy that can never run out
Withdraw the same percentage of your live portfolio every year and, mathematically, you can never go broke. The catch is that your income lurches around with the market. Here's the trade in full.
The constant-dollar rule we just met gives you a rock-steady income and hands all the uncertainty to your portfolio. This post is its mirror image, and understanding the pair together teaches you almost everything about the decumulation trade-off. The constant-percentage strategy does the exact opposite: it keeps the portfolio mathematically indestructible and hands all the uncertainty to your income. It is the second stop on our withdrawal-strategy tour, and it’s the purest illustration of “you can’t have both.”
How it works
Each year, you withdraw a fixed percentage of whatever your portfolio is worth right now. Not a fixed amount adjusted for inflation — a fixed slice of the live balance. Say you settle on 5%. If the portfolio sits at £1,000,000 in January, you take £50,000 that year. If markets tumble and it’s worth £800,000 the next January, you take 5% of that — £40,000. If it climbs to £1,200,000, you take £60,000.
Notice what you’re doing: recomputing from scratch every year off the current value, with no memory of what you took last year and no inflation ratchet. Your withdrawal rises and falls in lockstep with the portfolio, always the same proportion of what’s actually there.
The magic trick: you can’t go broke
Here’s the property that makes this strategy fascinating, and it’s genuine: taken literally, constant-percentage withdrawals can never deplete the portfolio to zero. You’re always taking a slice of what remains, and a percentage of a positive number is always a smaller positive number. Take 5% of anything and 95% survives to the next year. The pot can shrink dramatically, but it can’t hit zero, because you never withdraw a fixed sum that could exceed the balance.
That completely disarms the twin monsters of the fixed strategies. Sequence-of-returns risk loses most of its teeth — when the market crashes, your withdrawal automatically shrinks with it, so you’re not forced to sell a fixed pound amount into the fall. You sell a constant fraction, which is exactly the self-correcting behaviour that protects the base. And longevity risk is disarmed too: since the pot can’t reach zero, it doesn’t matter whether you live to 90 or 110 — there’s always a portfolio to take a percentage of. On paper, this strategy solves the two hardest problems in retirement at a stroke.
The catch: your income is on a rollercoaster
On paper. In your actual life, the flaw is severe, and it’s the reason almost nobody uses this in its pure form. Your income becomes wildly, uncomfortably volatile — because it’s now welded directly to the market.
Live through a 2008-style year where equities halve, and your income halves with them, immediately, with no buffer. A retiree who was comfortably spending £50,000 could find themselves with £30,000-something the following year, precisely when everything feels frightening. The strategy that “can never run out” can absolutely deliver you an income too low to live on. And here’s the sting: while a pure percentage withdrawal can’t hit zero, it offers no promise that your income stays above what you actually need to eat and pay rent. “The portfolio survives” and “you can pay your bills” are not the same guarantee, and this strategy only makes the first.
There’s also no inflation protection built in. Your income tracks the portfolio, not the cost of living — so in a bad market that coincides with high inflation, you get a double squeeze: fewer pounds, each worth less.
Who it suits
Pure constant-percentage is really a teaching tool and a building block rather than a strategy most people run neat. It suits someone with very high spending flexibility — a big cushion of discretionary spending they can genuinely cut in bad years without hardship — and a strong stomach for income swings. If a large fraction of your budget is “nice to have” rather than “must pay,” you can absorb the volatility, and in exchange you get a portfolio that mathematically endures.
For most people, though, halving your income overnight is not a theoretical inconvenience; it’s a wrecked year. Which is exactly why the next several strategies exist: they are all attempts to keep this method’s self-correcting safety while taming its brutal income swings.
Where it leads
Constant-dollar and constant-percentage are the two poles of the whole field. One fixes your income and floats your portfolio’s survival; the other fixes your portfolio’s survival and floats your income. Every sophisticated strategy in the rest of this series lives between these two poles, trying to capture the best of each — a paycheque steady enough to live on, a portfolio responsive enough to survive.
The most direct hybrids come next: Vanguard’s dynamic spending takes the percentage method and bolts a floor and ceiling onto it to cap the income swings, and the Guyton-Klinger guardrails start from a fixed income but flex it when markets stray too far. Both are, in a real sense, this strategy with the sharp edges filed off.
Strata models this as the “Fixed Percentage” strategy — the same percentage of the live portfolio every year, income following the pot up and down. Running it beside Fixed Dollar in the same projection is genuinely illuminating: you watch one line hold your income steady while the portfolio’s survival wobbles, and the other hold the portfolio steady while your income wobbles. Seeing the trade-off drawn out is worth more than any verbal description of it. Next, the first of the hybrids that tries to give you both — the Guyton-Klinger guardrails. Or build your portfolio and put the two poles side by side on your own numbers.