Safe Withdrawal Rate
What is a safe withdrawal rate?
The safe withdrawal rate is the percentage of your pension pot you can take each year with a high chance of not running out of money during retirement. It’s a guide for people using drawdown rather than buying an annuity.
Where does 4% come from?
The “4% rule” comes from a 1994 study by financial planner William Bengen. He found that if you withdrew 4% of your portfolio in year one, then adjusted for inflation each year after, your money would have lasted at least 30 years in most historical scenarios.
It’s based on US data with a specific mix of stocks and bonds. Your mileage may vary.
Does 4% still work?
It’s debated. Some argue lower interest rates and longer lifespans mean 3-3.5% is safer. Others point out the original study was conservative and 4% is still reasonable. The truth is nobody knows—it depends on future market returns.
What matters is having a plan and being flexible if things don’t go as expected.
How do you use it?
If your pension pot is £500,000, a 4% withdrawal rate means taking £20,000 in the first year. Next year, you’d increase that by inflation. If your portfolio grows, you’re ahead. If it falls, you might need to cut back.
Key points
- 4% is a starting guideline – not a guarantee
- Based on historical data – future may be different
- Be flexible – adjust if markets do badly
- Consider other income – State Pension, part-time work, etc.