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The basics
Each retirement year starts with the previous year’s closing account balances. The rule budgets a fixed percentage of that portfolio for the year.
A smaller portfolio produces a smaller budget, and a larger portfolio produces a larger one. Your simulator settings determine how this budget affects flexible spending and how the floor and ceiling apply.
Illustrative numbers
A 4% share through a fall and a bull run
The yearly share4%
Spending cards, before scaling$52,000
Free cash the year settles first$12,000
Retirement year — portfolio $1,000,000scale 1.000 · spends $52,000
The year after a 30% fall — $700,000scale 0.769 · spends $40,000
Eight good years on — $1,700,000scale 1.538, held at 1.500 · spends $78,000
Floor and ceiling in force60% and 150% of the cards
In the retirement year the portfolio’s $40,000 budget and the year’s $12,000 of free cash meet the cards’ $52,000 exactly, so the rule is invisible and the plan spends what it says. After a 30% fall the budget is $28,000 and the household spends $40,000 — the whole of the cut lands on the portfolio’s part of the bill, because the income was already spoken for. Eight strong years later the raw arithmetic asks for 1.538 times the cards, and the ceiling holds it at 1.500, so the household spends $78,000 rather than the $80,000 the share alone would have allowed.
Calculation transparency
How it works in MoneyWhatIf
- 01
The rule lives only in retired years the strategy’s window covers. A working year, or a year outside the window, passes through at a scale of one — and because this rule keeps no memory from year to year, there is nothing carried forward for that pause to disturb.
- 02
There is no anchor year: every year is read fresh. The portfolio is last year’s closing balances of the plan’s accounts, each floored at zero and added together — the same statement a required minimum distribution is worked out from — and the chosen share, 4% by default and clamped to between 0.5% and 20% when a plan is loaded, is multiplied by that figure to give the year’s budget.
- 03
Free cash is the year’s other money, netted before the cards are reached: the income streams — wages, Social Security, a pension in payment, an annuity — and rent in; payroll tax, the income tax the year’s row already settled, pre-tax and after-tax contributions, what a job’s own pension took, the mortgage, property tax and upkeep, scheduled debt payments, and any spending card the rule was not given permission to bend, all out.
On a plan whose tax settles the following April, that income tax is only the share the paycheck withheld, and last April’s settlement joins the list — out when it was a bill, in when it was a refund.
- 04
The scale is that budget plus the free cash, divided by what the in-scope cards say at a scale of one. Income is spent first and the portfolio’s budget sits on top, so the share sizes the portfolio’s part of the bill rather than the whole of it — a household with a pension covering half its life sees half the movement.
- 05
The scale is then held between the floor and the ceiling, 60% and 150% of what the chosen cards say by default. The ceiling can never be saved below the floor, or below leaving the plan alone.
- 06
A retired year whose in-scope cards come to nothing at all is skipped at a scale of one, because there is nothing there to scale.
- 07
The scale multiplies each in-scope card’s amount before the row is posted, so the ledger, the flow chart, the tax the year settles, the cash buffer, the withdrawal and any Medicare surcharge two years later are all quoting the same bent bill. The tax the withdrawal itself owes is grossed up downstream and is never inside the share.
Keep in mind
Model limits
The model works in whole plan years and reads the portfolio once, from last year’s close, so a fall that happens in March and recovers by December is invisible to the rule; a household re-reading its own balance monthly would not spend these figures.
Published versions of the constant-percentage rule usually divide the whole year’s budget by the portfolio, while MoneyWhatIf sizes only the portfolio’s share of it — income, taxes, housing and debts are settled first — so a household living largely on income sees smaller adjustments here than a bare reading of the rule would produce.
The floor is a promise the arithmetic cannot keep on its own: once the accounts are spent down, a floored scale still asks for money, and the plan meets it from whatever remains or records the shortfall.
The model cannot know whether a household would truly cut its budget in the year the rule says to, and a projection run without funding keeps its spending as written whatever the setting says.
This explanation documents the planning model. It is educational, not individualized tax, legal, Medicare, or investment advice.
Where it appears
Where to use it
See this concept in context, with a guide to each page and its controls.
The words behind it
Related financial terms
Plain-English definitions, with 2026 figures and worked examples, from the financial terms glossary.