The Spending Problem Nobody Talks About in Retirement

​The examples and case studies in this article are hypothetical but represent real situations I have encountered in my practice working with Washington State public employees.

There is a question I hear in almost every initial meeting with a new client.

It is some version of: "How do I know I am not going to run out of money?"

I get it. You’ve spent 25 or 30 years saving, and now someone is telling you to reverse the habit. To start spending.

But here is what caught my attention recently. A Morningstar research report looked at nine different withdrawal strategies for retirees. And buried in the data was a pattern I keep seeing.1

The biggest risk for many retirees is not overspending. It is underspending.

Research has shown that retirees with at least $500,000 in savings had spent less than 12% of their nest egg nearly 20 years into retirement. More than a third had actually grown their wealth.2

People who saved diligently their entire careers are reaching the end of their lives with more money than they started with. They skipped the trips. They said no to helping their kids with a down payment.

For Washington State public employees with a pension, this pattern can be even more pronounced. You already have a guaranteed income floor. And yet the instinct to not spend from the portfolio stays strong.

Why the 4% rule makes it worse

The traditional 4% rule was developed by financial planner Bill Bengen in the early 1990s. Take 4% of your portfolio in year one, adjust for inflation each year, and your money should last 30 years.3

It is a fine starting point. But that is exactly what it is. A starting point.

Even Bengen himself has said he uses closer to 5% for his own portfolio.4

The core problem is that the 4% rule does not adapt. Your portfolio drops 30%? Same withdrawal. Your portfolio doubles? Same withdrawal. It was built for the worst-case scenario, which means in most scenarios you leave a lot of money on the table.

For someone with a Washington State pension providing $3,000 or $4,000 a month in guaranteed income, that rigidity is especially costly. Your pension already covers a significant portion of your basic expenses. Your portfolio does not need to do all the heavy lifting.

What flexibility actually looks like

The Morningstar research tested several flexible withdrawal strategies that outperformed the 4% rule. My personal favorite and the one we use with our clients is called the Guardrails method, originally developed by financial planner Jonathan Guyton and computer scientist William Klinger.5

Here is how it works in plain language.

You start with an initial withdrawal rate. Morningstar's research found the Guardrails approach supports a starting rate of 5.2%, compared to roughly 4% with the traditional fixed method.1

Each year, you check whether your withdrawal rate has drifted too far from that starting point. If your portfolio has done well and the withdrawal rate drops more than 20% below your starting rate, you give yourself a raise. If markets have struggled and the rate climbs more than 20% above, you take a modest temporary pay cut.

That is it. Only one of four things happens each year: you skip the inflation adjustment after a down year, you adjust for inflation normally, you get a raise, or you take a small cut.

The beauty is in the simplicity. You are not guessing. You are not reacting emotionally. You have a set of rules that tell you exactly when to spend more and when to pull back.

How this plays out for a PERS 2 member

Let me walk through a hypothetical example.

Say we have a 58-year-old county employee with 28 years of PERS 2 service. Her pension will pay roughly $4,200 per month. She and her husband have $700,000 in their DCP and IRA accounts combined. They will also have Social Security.

Using the traditional 4% rule, Karen would withdraw $28,000 per year from her portfolio. That is about $2,333 per month on top of her pension.

Using the Guardrails approach at 5.2%, she would start at $36,400 per year, or about $3,033 per month. That is an extra $700 per month in the first year alone.

Over 30 years, the Morningstar data showed the Guardrails method produced roughly 16% more in total lifetime spending compared to the fixed approach, while the median ending portfolio balance was still significant.1

That extra money could bridge health care costs through PEBB retiree coverage until Medicare at 65. Or fund travel in those early, active retirement years. And when markets cooperate, the guardrails tell her it is safe to spend a little more. When they do not, she pulls back modestly. No panic. No guesswork.

The real problem is not math

Here is what gets overlooked in these conversations.

The spending problem in retirement is not really a math problem. It is a psychological one.

Research shows retirees spend about 80% of the income they receive from guaranteed sources like pensions and Social Security. But they spend less than half of what they could from their investment accounts.2

Same dollars. Same purchasing power. But money that arrives as a paycheck gets spent. Money sitting in a brokerage account feels untouchable.

That is why rules-based frameworks matter. When you have clear guardrails telling you when it is safe to spend more and when to pull back, you are essentially turning your portfolio into a paycheck. And for my clients with DRS pensions, that portfolio paycheck is supplementing an already solid foundation.

What to do with this

If you are a Washington State public employee within a few years of retirement, here is what I would think about.

First, know what your pension and Social Security (if you have it) actually covers. Log into your DRS account and look at your estimated benefit.6 That number is the foundation for everything else.

Second, stop thinking of the 4% rule as a ceiling. It was built as a worst-case floor. If you are willing to be flexible with your spending, the research suggests you can start higher.

Third, consider whether a rules-based withdrawal strategy fits your situation. If you need perfectly consistent income with zero variability, a more rigid approach might suit you better. But if you can tolerate modest adjustments, the potential payoff in lifetime spending is meaningful.

Your pension gives you a head start most retirees do not have. The question is whether you are going to use it.

​Sources
1. Arnott, Amy. "The Best Strategies for Boosting Starting Withdrawal Rates in Retirement." Morningstar. https://www.morningstar.com/retirement/best-strategies-boosting-starting-withdrawal-rates-retirement
2. "Retirees can be too frugal with their spending." CBS News. https://www.cbsnews.com/news/retirees-can-be-too-frugal-with-their-spending/
3. "Determining Withdrawal Rates Using Historical Data." RetailInvestor.org. https://retailinvestor.org/determining-withdrawal-rates-using-historical-data/
4. "The inventor of the 4% rule just changed it." MarketWatch. https://www.marketwatch.com/story/the-inventor-of-the-4-rule-just-changed-it-11603380557
5. Guyton, Jonathan. "Decision Rules and Portfolio Management for Retirees: Is the 'Safe' Initial Withdrawal Rate Too Safe?" 2004. https://www.semanticscholar.org/paper/Decision-Rules-and-Portfolio-Management-for-Is-the-Guyton/384c2ebfa36a69f9c346f9456c5cbca63306b4c9
6. Washington State Department of Retirement Systems. "Online Account Access." https://www.drs.wa.gov/