The actuarial methods: VPW and the RMD approach

Every strategy so far has started by guessing a withdrawal rate — 4%, 5%, whatever — and then arguing about whether it’s safe. The actuarial methods refuse to guess. They compute your withdrawal directly from the one fact that matters most and that all the others ignore: how many years you probably have left to fund. This is the fifth stop on our withdrawal tour, and it covers two close cousins — Variable Percentage Withdrawal (VPW) and the RMD method — that share one elegant idea: spend the pot down deliberately over your remaining lifespan, no crystal ball required.

The core idea: amortise your life

Both methods borrow their logic from the least glamorous corner of finance — the amortisation schedule, the same maths that turns a mortgage balance into a monthly payment. Flip it around. You have a pot of money and a number of years to spread it across. Divide one by the other and you get this year’s spending. Do it again next year with the new balance and the new (shorter) remaining lifespan. That’s the whole engine.

The beauty of it is that the withdrawal automatically adjusts to two things at once. When the portfolio grows, the numerator grows and you spend more. And as you age, the denominator shrinks — fewer years left to spread the money over — so the percentage you withdraw naturally rises over time. A 65-year-old spreading their pot over ~30 years withdraws a small slice; an 85-year-old spreading it over ~8 years withdraws a much bigger one, and rightly so, because there’s less future to save for. The method spends conservatively when you’re young and longevity risk is high, then loosens the taps as the runway shortens. No other strategy handles ageing this gracefully, because no other strategy actually looks at your age.

The RMD method

The simplest version is already built into US tax law. Retirees with traditional retirement accounts are forced to take Required Minimum Distributions once they reach the relevant age, and the formula the IRS uses is exactly this: take your prior-year-end balance and divide by a life-expectancy factor from the IRS Uniform Lifetime Table. That’s it — balance ÷ years left.

Researchers noticed that this legally-mandated formula is, quite by accident, a perfectly reasonable voluntary withdrawal strategy. It never runs the pot to zero (you’re always dividing by a positive factor), it self-adjusts to markets and age, and it requires nothing more than a balance and a lookup table. As a decumulation rule it’s crude — the IRS tables weren’t designed for optimal spending — but it’s remarkably serviceable, and it has the rare virtue of being a strategy you can explain to anyone in one sentence.

VPW: the tuned-up version

Variable Percentage Withdrawal, popularised in the Bogleheads community, is the same idea done more carefully. Instead of the IRS’s one-size table, VPW computes the withdrawal as a proper amortisation: it divides the portfolio over your remaining years using an assumed rate of return, via the present-value annuity factor that finance uses to price any stream of payments. Bake in an expected return and the schedule can front-load your spending a little more sensibly than the return-agnostic RMD table, while still guaranteeing the pot lasts your whole horizon.

The result is a withdrawal percentage that’s fully determined by your age and your return assumption — published as a simple table you read off each year — applied to your live portfolio value. Young retiree, low percentage; old retiree, high percentage; and the pound amount rides up and down with the market on top of that.

The catch: income volatility, again

If this sounds too good, here’s the price, and it’s the same one the pure percentage method pays: because the withdrawal is a percentage of the live portfolio, your income swings with the market. A bad year cuts your spending, sometimes sharply. The actuarial methods solve longevity risk and sequence risk beautifully — the pot can’t run dry and it shrinks its own withdrawals in a downturn — but they do nothing to stabilise your year-to-year income. In fact, because the withdrawal percentage climbs as you age, a bad market late in life can combine with a high withdrawal rate to produce a genuinely bumpy ride.

So these methods sit firmly on the “protect the portfolio, float the income” side of the trade-off. They’re the most mathematically honest strategies on the tour — they never pretend your money is infinite or your lifespan unknown — but honesty about the portfolio is bought with volatility in the paycheque. As ever, that’s tolerable in proportion to how much of your spending can flex.

Who it suits, and how to test it

The actuarial methods suit the retiree who wants to spend their money efficiently — to actually enjoy the pot over their lifetime rather than die with most of it unspent, which is the constant-dollar retiree’s quiet tragedy — and who has enough flexibility to ride the income bumps. They’re especially attractive to those who dislike leaving a huge accidental inheritance and would rather the schedule aim, deliberately, at spending the money down over the years they expect to have.

Strata models this as the “Variable Percentage (VPW)” strategy: each year it draws the pot amortised over your remaining years using the present-value annuity factor, exactly the mechanism described above. Running it in a projection shows you the signature shape — a withdrawal rate that starts modest and rises with age — and a Monte Carlo pass shows how the income bumps land across different market sequences. It’s the clearest way to see the difference between a strategy built to preserve capital forever and one built to spend it on purpose.

Next we borrow a trick from the people who manage money meant to last literally forever — universities — and look at the endowment spending-smoothing rule. Or build your portfolio and watch the actuarial schedule play out on your own numbers.