With retirement often lasting 20-30 years, it’s important that you don’t run out of money. Fortunately, your State Pension will continue to be paid however long you live. So too should any company or personal pensions you may have. In contrast, your private savings could run out if you withdraw too much.
What’s a safe withdrawal rate?
This is a difficult question to answer. It depends on a number of different issues:
- Preserving your savings. Whether or not you want to preserve most or all of your savings to pass on after you die has a big influence on how much you can withdraw.
- How long you live for. The longer you live the more risk there is that your money could run out. Obviously, most of us don’t know how long we have to live (so this is difficult to factor into our calculations), but if you do have a serious illness that is likely to shorten your lifespan this can affect how much you take.
- The investment environment. If markets perform well, particularly in the early years of your retirement, this can give your savings a real boost. If they perform badly, again, particularly in the early years, this can have a devastating impact on your savings.
- Asset allocation. Where you decide to invest (cash, equities, bonds), can also have a major impact on how long your money might last. For example, too much in equities when markets are falling can be very damaging. Conversely, putting all your money in cash may mean you don’t earn enough interest to sustain your income
So what’s the answer?
Given the number of variables it’s almost impossible to guarantee that you won’t run out of money, but we can give you some guidelines based on studies on this subject:
Generally, after allowing for inflation, withdrawing 4% of your savings each year is considered low risk and 5% is fairly low risk (particularly if you’re not too concerned whether you leave money when you die).
Again, these are not guarantees, but the general consensus is that these are reasonable withdrawal rates and in most circumstances will ensure you don’t run out of money before you die.