The problem with using a normal portfolio is that we have a tendency to chase safety. We look for the lowest withdrawal rate which, historically, has always been successful.
However, success is not always about holding onto our money. It is also about getting to use that money to live out our dreams - having fun experiences, seeing loved ones, etc.
And sometimes we are too careful, after years of conditioning ourselves to save and invest, to spend this money.
Here is my solution. Two investment pots. Your "core" pot can be as safe as you like. Go the whole hog and draw a measly 3% per year, safe in the knowledge that nothing can ever hurt you. Your core living costs are covered, and by this I mean the utilities bills and the groceries, plus your "normal" minimum social spending. This pot needs to pay for everything that you'd want to spend even during a stock market crash.
Then create a second pot, for "fun" spending. Adventures, travel, a new hang-glider - whatever floats your boat. And go crazy with it - withdraw 10% a year. Or perhaps 8% or 12%. This is the spare money for fun things, a pot of money which you want to be sure to spend during your active lifetime.
This started life with my desire to travel during retirement, before I expect to slow down, which will perhaps be in my 70s. I wanted to create a pot which needed to be spent - I wanted the experiences, not the capital preservation. I wanted to burn through it during the first years of retirement, at a rate which meant it would be exhausted at about the same time that I slow down.
With that in mind, maybe 10% isn't the right figure for you. I just played with a compound interest calculator and figured that, on average, a 10% withdrawal is likely to exhaust the pot in around 13 years. If you anticipate more years of active retirement, shoot for a slightly lower figure.
For ease of maths, you could hold your core pot in one global index fund, and your fun pot in a different global index fund. Then you won't have any doubt about which units are allocated to which fund.
Inflation handling
As usual, start out retirement with a chosen percentage withdrawal from your pot, giving you an actual figure in pounds. Then each year you do not then withdraw that same percentage from whatever the pot has grown to! Instead, you take your pounds figure and apply an inflation increase to it. If you began with £15k and inflation has been 3.5%, you can withdraw £15,525.
Apply your inflation increase to both pots.
Risk
What happens during a crash? Do you need bonds for a rainy day?
Your core pot, at a 3% withdrawal rate, is safe. No, really safe. It would not ever have run dry in the history of the world. If there's a crash, you can keep on drawing. (Which is fortunate, because this doesn't contain much elective spending - this is all necessities.) Your withdrawal rate may temporarily peak at 5% or 6%, but you've been cautious along the way and should have plenty of padding in here to help it cope.
With your fun pot, you need to remember that when it's gone, it's gone. During a crash, this is the pot which you can easily protect, by reducing your withdrawals. It's entirely up to you what rule you choose for cutting withdrawals - maybe halve it during a dip of up to 20% from the recent high, and cut the fun spending to zero during a deeper crash than that. Equally, during the normal years and good years, you can afford to spend some of the actual growth and capital. You don't need to use a wiggle factor and only draw part of the pot's earnings - no 4% from 10% growth.
Overflow
Your core pot will probably grow a lot. In an average year, you'd be spending less than half of the growth. (Average growth around 10% including inflation, around 7% net of inflation.)
Some of this padding is necessary, and it is what keeps you safe. But there comes a point where your actual withdrawal rate is dropping, in terms of your current pot. Let's say you begin drawing £15k a year from a £500k pot. Then let's say you have a great year and the fund doubles in size. Your £15k now represents a mere 1.5% withdrawal rate from your actual £1M pot. (Or your inflation-adjusted £15,525 is a mere 1.55% from your £1M pot.)
This actual withdrawal rate is too low. If you were starting out your retirement today, it's too cautious a figure, and you could safely spend more.
Here's where the overflow pipe comes in. Each year, you set a minimum withdrawal rate. Maybe a reasonable minimum would be 2%, that's allowing 50% growth in your pot size. If the pot has grown so much that your withdrawal rate is lower than this, well, you need to shift some of the money into your fun pot.
You can either actually sell one fund and buy another, or maybe it would be simpler to just withdraw the overflow to spend.
This is true excess wealth. You may already be living the life you want, in which case maybe this is the point at which you begin to address any other priorities that you have in the background - gifting to the next generation, or supporting charity.
(Your fun pot doesn't need an overflow, because in there, every day is already party day with a high withdrawal rate that is close to typical growth rates.)
Conclusion
You don't need to use a separate platform or account for your second pot. You can just do this in your current SIPP or ISA, simply by owning a second index fund. To take inspiration from the funds suggested on Rebel Finance School, you could have Vanguard FTSE Developed World Ex-UK as your core pot, and Vanguard FTSE Global All-Cap as your fun pot.
If you are struggling to allow yourself to spend, after years of frugality training during your accumulation phase, maybe this idea will help?
* I like the word "stratagem". It sounds like a cunning plan from evil aliens in a 1970s Doctor Who story.
