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It's the 4% rule on steroids. Here's what it is and why it may work for you.
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By
Donna Fuscaldo
published
16 December 2025
in Features
Some retirees are happy living off the interest and dividends from their portfolio investments, leaving the principal to grow. Others are willing to take a risk if it means they could hit the jackpot with their investments and live comfortably off the returns. Many people want a little bit of both strategies, generating a safe income stream and some returns to make it last.
They can have the "Best of Both Worlds" with the total return approach to retirement spending.
"It's not just about the interest, dividends and income generated, it's also about capital appreciation," said Eric Dostal, managing director at Wealthspire Advisors. "You have to think about how to optimize your portfolio to not only generate income but grow at a reasonable clip."
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Sign upIf you don't, you risk your investments not keeping up with inflation, which is a real possibility given that retirement can easily last 20, if not 30 years.
By adding potential growth to the mix, you may achieve better long-term returns, keeping your money's buying power in step with inflation. That's what the "Best of Both Worlds" approach to retirement spending gives you.
It also gives your portfolio time to recover if markets go south, helping avoid the sequence-of-returns risk. That occurs when your portfolio takes a hit early in your retirement, reducing the amount you have to live on later.
Plus, you're in the driver's seat. If you need more or less, you can adjust your spending rate with this flexible withdrawal rule.
Live off the returns and keep your balance growing
Think of the "Best of Both Worlds" or total return retirement spending rule as the 4% rule on steroids — retirees live off both the income and investment returns. The rest continues to grow and compound. It works like this:
Step 1: Determine your initial withdrawal rate. For many people 4% is an ideal initial withdrawal rate, but Dostal says it could be higher or lower depending on your situation and the economy. Morningstar's advice, for example, is for those retiring in 2026 to start with a 3.9% withdrawal rate.
Your rate is also likely to increase the further along you are in retirement, especially if an unexpected illness or health care emergency requires more money. On the flip side, if you retire during a down market, you could spend less than 4% a year.
Whatever annual withdrawal rate you decide on, the money would come from a combination of Social Security, dividends, interest payments, pensions or other recurring income and investment returns.
Step 2: Set guardrails. This is where the 4% rule on steroids comes in. Let's say you decided on 4% a year. If your returns exceed those in a given year, you can spend more. If the portfolio does worse than 4%, you spend less. That is known as guardrails, and it's important to set them. Withdrawals can be temporarily increased after a strong market year or temporarily reduced during a downturn to protect the principal.
Step 3: Rebalance regularly. The total return or "Best of Both Worlds" approach is not for the set-it-and-forget type of retiree. For it to work, you have to be willing to rebalance the portfolio by selling appreciated stocks and buying underperforming ones.
Sure, the income portion of the strategy is passive — you are getting paid dividends or bond payments, but returns from stocks that have appreciated require action on your part or that of your financial adviser.
There are also short- and long-term capital gains, as well as other tax implications to consider. That's why Dostal says that while it's something you could DIY if you have the expertise or are willing to learn, you may be better off working with a financial adviser if this is a retirement withdrawal strategy that appeals to you.
What could go wrong
Just like with any withdrawal strategy, some things can go wrong, which is why setting guardrails is important. It's easy to overspend when the markets are doing well, but having guardrails can keep you disciplined and on track.
If it's more out of your control, say inflation outpaces the performance of your investments, or the stock market tanks for an extended period, having enough short-term cash on hand to weather the storm so you don't have to sell assets at depressed levels is a strategy worth implementing ahead of time.
Ultimately, working with a trusted financial adviser may be the best way to ensure you avoid costly mistakes when implementing this strategy.
If you like a little risk, this could be for you
Retirement withdrawal strategies come in all different shapes and sizes, and that is true of the total return, or the "Best of Both Worlds" rule of retirement spending.
This one is for those retirees who have enough money saved to easily withdraw 4% annually, but want to spend more. Such retirees aren't afraid of risk if it means growth in their portfolio; they are OK with flexibility and like a bit of a hands-on approach.
If that sounds like you and you're looking for a way to make your money last and keep pace with rising costs for a more inflation-proof retirement, this might be the strategy for you.
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Donna FuscaldoSocial Links NavigationRetirement Writer, Kiplinger.comDonna Fuscaldo is the retirement writer at Kiplinger.com. A writer and editor focused on retirement savings, planning, travel and lifestyle, Donna brings over two decades of experience working with publications including AARP, The Wall Street Journal, Forbes, Investopedia and HerMoney.
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