Most retirement income strategies assume spending will remain relatively stable over time. You retire, determine a sustainable withdrawal amount, and then spend roughly that amount for the rest of your life, perhaps adjusting for inflation along the way.
That assumption is so common that it often goes unquestioned. Yet there are retirement income strategies built on a very different idea. Rather than trying to keep spending stable, they intentionally allow spending to rise and fall over time based on portfolio performance, interest rates, and even life expectancy.
One example is the Annually Recalculated Virtual Annuity, or ARVA. The strategy highlights an interesting tension in retirement planning. The spending strategy that works best mathematically may not always produce the spending pattern people actually want.
Spending Based on What an Annuity Would Pay
The mechanics are fairly straightforward, though the choice of benchmark is what makes the strategy unique. Rather than selecting a withdrawal rate and sticking with it, the retiree uses current annuity pricing to estimate how much annual income their portfolio could support. Annuities are useful for this purpose because their payout rates reflect current interest rates, age, and life expectancy.
Suppose a retiree has a $1 million portfolio and an immediate annuity would provide $70,000 of annual income. Under the ARVA approach, that $70,000 becomes the spending target for the year.
The annuity is never purchased. It simply serves as a benchmark for determining a sustainable withdrawal amount. The following year, the process is repeated. If the portfolio has grown, spending may increase. If markets have struggled, spending may decline. Changes in interest rates and advancing age can also affect the calculation.
The result is a spending strategy that adjusts as markets, interest rates, and life expectancy change.
Why the Numbers Often Look Attractive
Strategies like ARVA often support higher spending rates than traditional withdrawal rules. The reason is not better investment returns, but accepting more variability in future spending.
A strategy built around a fixed withdrawal amount must be conservative enough to survive a wide range of market environments while maintaining a relatively stable income stream. ARVA takes a different approach. Because spending is recalculated each year, the strategy can respond to changing circumstances rather than trying to maintain the same spending level regardless of what happens in the market.
That flexibility often allows for higher withdrawals, particularly during the early years of retirement. The tradeoff is that spending may need to be reduced following periods of poor market performance. Higher spending today is possible because the strategy does not promise the same level of spending tomorrow.
If you want to see how a tradeoff like that would actually play out with your own numbers, our Variable Spending and the PAY Rule Calculator workshop walks through applying this kind of approach to your own portfolio, step by step.
The Part That Feels Backward
The most interesting part of an annuity-based spending strategy may not show up until later in retirement. As life expectancy shortens, annuity payout rates generally rise. From a mathematical perspective, that means a larger percentage of the remaining portfolio can be spent each year.
The reality is that people do not always spend the way the math suggests they should. A strategy based on annuity payout rates may support larger withdrawals in someone’s eighties than it did in their sixties. Yet actual retirement spending often follows a different path. The early years are frequently the most active and expensive. Travel, hobbies, and new experiences tend to occur when health and energy are at their peak. As retirees age, spending often slows naturally.
That doesn’t mean the strategy is flawed. It simply highlights that people’s spending preferences don’t always align with what the math suggests. A retiree may have the ability to spend more at age 85 than at age 65, but that doesn’t necessarily mean they want to. By then, the trips may have already been taken, the hobbies may have changed, and spending priorities may look different.
A Lifestyle Decision Disguised as a Math Problem
It is easy to evaluate withdrawal strategies by comparing percentages, probabilities, and portfolio outcomes. Retirement research is filled with studies aimed at identifying the most efficient way to generate income from a portfolio.
But retirement is not lived on a spreadsheet. A strategy that supports higher spending later in life may look appealing on paper, and one that produces steadier income may look less efficient. Neither observation tells us whether the spending pattern actually fits the retiree.
Some people are comfortable adjusting spending from year to year. Others place a high value on predictability and prefer to know roughly how much they can spend, regardless of what markets happen to do. That is what makes strategies like ARVA interesting. They remind us that retirement income is not just about maximizing withdrawals or extending portfolio longevity, but about matching a spending strategy to when those dollars are likely to matter most.
Want to learn more? Listen to Episode 236 of the Retire With Style Podcast.
