The problems retirees with investable portfolios face can be tough to address. Perhaps foremost among these is that retirees don't want to run out of income before they run out of life. There are approaches for dealing with this, such as (1) starting with historically very low withdrawal rates, (2) buying lifetime annuities, or (3) creating income ladders. There are issues with all of these approaches though, potentially including having a high likelihood of having a very large portfolio left at death and not spending as much as was possible (1 & 3) or 'locking in' historically low rates of return and (usually) permanently giving control of the annuitized assets (2).
Another problem not mentioned nearly as often is that while most of the traditional withdrawal strategies assume relatively fixed income needs from the point of retirement until death, this is not supported by real world data. Approximately two-thirds of retirees report that their spending declines over their retirement (half of the remainder report no change in spending, and the other half report spending increases). Retirees tend to reduce their annual spending in real dollars by 1-2% annually, even during their latter years when increased medical costs are offset by reduced transportation, food, and discretionary spending; there are clearly exceptions to this, but they are indeed exceptions to the widespread trend.
This means that retirees' are likely to need/want to spend more in the early years of retirement and less in the later years of retirement. But since retirements have a significant possibility of lasting decades, spending more in early years raises the potential problems of encountering a poor sequence of returns early in the retirement, one's lifetime lasting longer one had planned for (e.g. when creating an income ladder or determining withdrawal rates), or both.
To date, the focus has been primarily on sacrificing retirees' need/want for more income in the early stages of retirement for the security of reducing the likelihood of running out of money. A notable exception to this are the concepts of time segmentation and essential-versus-discretionary strategies, which Wade Pfau briefly described as follows below.
https://www.advisorperspectives.com/art ... ent-incomeTime segmentation also differs from an essential-versus-discretionary strategy because it does not build a lifetime income floor. Rather, there is an income front-end with contractual protections. The assumption is that people have not saved enough to fund their entire lifetime of spending. Importantly, time segmentation also accounts for the fact that spending needs may change, and this requires flexibility and the avoidance of irreversible decisions.
At its core, though, time segmentation involves investing differently for retirement spending goals falling at different points in retirement. Fixed income assets with greater security are generally reserved for earlier retirement expenses, and higher volatility investments with greater growth potential are employed to support later retirement expenses.
Potentially combining these two approaches may offset some of the disadvantages of the common withdrawal methods. The basic gist of what I propose is this: split retirees' portfolio into two, one for essential spending (ES portfolio) and another for discretionary spending (DS portfolio). Then, apply different withdrawal methods for the two portfolios, based on your need, willingness, and ability to take on risk for both ES and DS. Income strategies involving use of the ESP should logically be more conservative than those involving the DSP. And while the primary purpose of the DSP would be to fund discretionary spending, which typically declines as retirees' age, a secondary purpose could be to at least partially fund significant essential spending needs that might arise, such as long-term care.
For the ESP, income strategies could involve purchasing immediate or deferred income annuities, creating a bond or CD ladder, the '4% rule of thumb' or an even lower starting withdrawal rate if desired, or some combination thereof. (It would not likely be advisable to use all of the ESP to purchase annuities, even if they included an inflation rider, since 'lumpy' ES needs may come along that need larger amounts of capital than the monthly annuity payment.) And all of this would be in addition to whatever Social Security benefits were available to the retirees.
For the DSP, which would consist of whatever remains after the ESP is funded, income strategies could be more aggressive in terms of both asset allocation (e.g. more stock heavy) and withdrawal rate than the common recommendations. I envision a percentage-of-portfolio withdrawal method with 6% annual withdrawals potentially being useful for a 65 year old couple. Using FIRECalc, a 70/30 portfolio with 6% annual withdrawals for 20 years would have left 31% of the original portfolio intact in real dollars in the worst case; the average ending portfolio balance would have been 89% of the starting balance. By the time they reach 85, most retirees' discretionary spending is finished, so depleting the majority of the DSP would not be a problem (it could almost be viewed as a goal). But in the majority of historical periods at least, a large portion of the DSP would remain intact, leaving the retirees with a bequest and/or funds for long-term care or other significant expenses later in life.
Before I start discussing models as to how this might play out with real numbers, I'd like to get feedback regarding what pros/cons you see of this strategy.