The Safe Withdrawal Rate in Retirement

When you approach retirement, you should think carefully about how long your money will last, especially if you plan to use flexible pensions, or drawdown to access your capital. Your retirement goal should be to ensure that your money lasts at least as long as you live. You can achieve this by using the concept of the Safe Withdrawal Rate. This allows you to calculate how much you can afford to withdraw from your pensions (and other retirement savings) before your capital is exhausted.

Key points:

  • What is the Safe Withdrawal Rate in retirement?
  • Why is the Safe Withdrawal Rate important?
  • Factors that influence the Safe Withdrawal Rate
  • Managing investment volatility
  • The 4% rule and the Safe Withdrawal Rate
  • Reviewing the Safe Withdrawal Rate

What is the Safe Withdrawal Rate in retirement?

The Safe Withdrawal Rate is the calculation of how much you can afford to spend from your retirement savings before you run out of money. This allows you to work out the amount of income that you can take, based on a variety of factors. Bear in mind that this calculation may change over time, so you need to review your progress. 

Why is the Safe Withdrawal Rate important?

When you retire, you will need to generate an income to fund your expenses, especially if you are no longer working. This retirement income may come from a variety of sources:

  • Pension savings
  • Final salary pensions
  • State pension
  • Investments or savings
  • Property
  • Working income

Some of these income sources may be guaranteed, and therefore would continue regardless. The State pension or a final salary pension would be an example of guaranteed income. 

However, if you have savings in pensions, or other accounts, then you essentially have 2 choices for this income:

  1. Guaranteed income
    Traditionally, pension savings would be converted to a retirement annuity. This is a guaranteed income for life, and is still appropriate for many people who want certainty for all or some of their retirement income. If you want certainty with your income then this product is appropriate for you, and you would not need to use the Safe Withdrawal Rate, since the future income would not be able to be changed.
  2. Flexible income
    It is common to use flexible pensions for retirement income, especially in the earlier years of retirement. This allows you to access your retirement savings when it suits you, and to alter the amount you take as your circumstances change. The downside is that you need to manage the income taken carefully – hence the Safe Withdrawal Rate calculation.

Factors that influence the Safe Withdrawal Rate

The Safe Withdrawal Rate concept requires you to make assumptions about the future that may not prove to be true. That is why you should regularly review your retirement income, based on the reality of your life, and how it is changing.

How much retirement income do you actually need?

Before you start your Safe Withdrawal Rate calculations, you should consider carefully how much retirement income you actually need. A variety of factors will influence this decision. Think about how your life will change after retirement, and what your expenses will be. Certain spending will reduce, but other areas may increase.

The amount of retirement income you need will influence your retirement withdrawal rate. The Safe Withdrawal Rate calculation will then help you to determine whether your retirement plans are likely to be secure, or more precarious. In practice, the lifestyle you lead, and your actual expenses, are much more likely to influence how much you withdraw from your retirement savings, whether this is a safe withdrawal rate or not.

The size of your retirement savings

Clearly, the larger your retirement savings, the more income you should be able to withdraw from the pot. The whole purpose of the Safe Withdrawal Rate calculation is to establish just how much you can take out.


The length of time you expect to live is very important when calculating the Safe Withdrawal Rate. Try not to under estimate how long you expect to live, as it may be longer than you think.


The Safe Withdrawal Rate calculation should take into account the future increases to your spending as the cost of living increases. The effect of this can be catastrophic to your spending power. Essentially, the withdrawals from your retirement savings are only likely to increase in the future, as prices increase. This will accelerate the depletion of your retirement savings if your income needs are too great.

Investment risk

In general, the more investment risk you are prepared to take, the greater the growth you can assume on your retirement savings. Many retirees take less risk than may be sensible, given that they need their retirement savings to last for 30 years or more. If you are prepared to take greater risk, you can assume more growth in your Safe Withdrawal Rate calculations, and the income is likely to be higher. If you want to be more cautious, then the withdrawal rate is likely to be lower.

Tax on your income

Retirement savings are likely to be taxed, although you can use pension tax-free cash to manage your income, especially in the early years of withdrawals. Take this into account when you review the Safe Withdrawal Rate against the income you actually require to live your lifestyle in retirement. You need to make sure that the Safe Withdrawal Rate is enough after tax is deducted on your income (or capital withdrawals from other investments).

Investment charges

If you plan on using flexible pensions in retirement, then the account will have charges, which will reduce the investment growth you can assume. Take this into account in your Safe Withdrawal Rate calculations.

Managing investment volatility

You should also take account of volatility in your investment portfolio. If your investments fall in value then the income you withdraw can accelerate the reduction in capital, meaning you run out of money sooner. You should have a plan in advance to cope with inevitable investment volatility

As a simple example, if you hold £100,000 in retirement savings. If we do not assume any investment growth, or any of the other factors listed above, then you could safely withdraw £10,000 per year for 10 years (without any increases for inflation). If your investment falls in value by 30% to £80,000, then the same withdrawal amount would mean you run out of capital in 8 years. The timing of any fall in value can have a significant impact on your Safe Withdrawal Rate.

Natural income

Some people manage investment volatility by taking the natural income from their retirement accounts. This means that you can allow the underlying capital to rise and fall according to market performance. The income paid by those investments determines the Safe Withdrawal Rate. If you use this method you need to have a plan in place to deal with the potential drop in income if your assets fall in value. You may need to spend less money, or use alternative capital, until the account recovers in value.

Reserving cash in a buffer account

A simple solution to investment volatility is to set up a buffer account, with 2 (or more) years of variable expenses put aside. This allows you to let your retirement capital rise and fall according to normal market fluctuations. If your retirement investments fall in value sharply, you can temporarily stop income payments, hoping for the capital value to recover. The buffer account allows you to continue with your expected income levels during that period. Of course, it is possible that investments could take longer to recover, but 2 years is a reasonable compromise since holding too much cash will hold back expected investment growth in normal periods.

The 4% rule and the Safe Withdrawal Rate

Many people use a general rule of thumb when calculating the Safe Withdrawal Rate. In 1994 a US financial planner published a study indicating that 4% was the Safe Withdrawal Rate for retirees planning to increase their income in retirement, and make their capital last for 30 years. Many additional studies have been performed since this research was published, and these generally suggest caution in using this approach, since markets are quite different in the current environment, and your investments may not match the study’s sample portfolio. The reality is that the is not a simple approach that suits every situation, and every retirement. 

Reviewing the Safe Withdrawal Rate

This article shows how difficult it will be to calculate your own Safe Withdrawal Rate in advance of your retirement. There are just too many variables to expect to get it right first time. Therefore, the best approach is to start with what seems reasonable, given all the data you have (using a calculation based on the factors listed above). You should expect that many of these assumptions will prove to be incorrect at particular periods, or over time as the market evolves. In addition, your own retirement income needs will also change, as your life changes. You will need to adapt your Safe Withdrawal Rate in retirement.

The solution is to regularly review your retirement investments, and adapt the Safe Withdrawal Rate calculations according to the circumstances at the time. We typically review our clients’ retirement income annually, as well as their investment portfolio, as part of our Prosper service. This allows them to establish a continuing Safe Withdrawal Rate for their retirement, using a financial plan, and to manage the investments in their portfolio to aim to fund that future income. Contact us if you want help to calculate your own Safe Withdrawal Rate.


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