It is the question almost every client asks at some point, usually in a slightly lowered voice: if I stop working, will the money last?
- The old '4% rule' is a starting point, not a personal answer.
- Sequence of returns — when poor years happen — matters enormously.
- Flexible spending dramatically improves how long a pot lasts.
- Cash-flow modelling gives a better answer than any rule of thumb.
Where does the 4% withdrawal rule come from?
Research published by the American financial planner William Bengen in 1994 suggested that withdrawing around 4% of a pot in the first year of retirement, then increasing with inflation, had historically lasted at least thirty years on US market data. It became shorthand for a "safe" rate.
It is a useful reference point. It is not advice, and it was never intended as a universal rule.
Why will your own safe withdrawal rate differ?
The 4% figure assumes a particular mix of investments, a particular time horizon and steady, inflation-linked spending. Real retirements rarely look like that. Most people spend more in the early, active years, less in the middle, and potentially much more if care is needed later.
What is sequence of returns risk?
Two retirees can average identical returns over twenty years and end up in completely different positions — simply because one hit poor markets in their first few years while drawing income. Selling units in a falling market to fund spending does lasting damage.
This is why the early years of drawdown deserve more attention than the later ones.
What makes a pension pot last longer?
- Flexibility. Being willing to trim spending slightly in poor years extends a pot significantly.
- A cash buffer. Holding one to two years of income in cash means you need not sell investments at the worst moment.
- Knowing your fixed floor. Covering essential spending with secure income — State Pension, any defined benefit pension, possibly an annuity — changes how much risk the rest can take.
- Reviewing annually. A withdrawal rate set once and never revisited is a plan on autopilot.
What is a better question than "what percentage is safe"?
Rather than "what percentage is safe", the more useful question is "what happens to my plan if markets fall 20% in year two, or if I live to 95?" Cash-flow modelling answers that, and it is a very different conversation.
Source: the 4% figure originates in William P. Bengen, “Determining Withdrawal Rates Using Historical Data”, Journal of Financial Planning, October 1994. It is based on historical US market data and is not a projection of future returns.
This article is general information, not personal advice. The value of investments can fall as well as rise and you may get back less than you invested. Past performance is not a reliable indicator of future performance. The information contained within this article was accurate at the date of publication and is subject to change. Reviewed by Bright Wealth before publication.