Safe withdrawal rates

How to navigate withdrawing income from your portfolio, safe withdrawal rates and market downturns

In previous blog posts, I’ve commented on safe withdrawal rates. Your withdrawal rate is calculated by taking the amount you are withdrawing from your retirement portfolio, and dividing it by the value of your portfolio. So, if you have a pension fund of £250,000, and you are withdrawing £7,500 per year, your withdrawal rate is 3%.

There has been plenty of research done about how high your withdrawal rate can be, before you risk running out of money during your lifetime. This safe withdrawal rate depends on how old you are when you start drawing on your savings, whether you are single or part of a couple, your state of health, how much investment risk you can tolerate, and whether you will be spending the money from your portfolio on essential or discretionary items, amongst other things.

There are plenty of rules of thumb about safe withdrawal rates, with the most often quoted being the “4% rule”; this only applies if you live in the USA, and you don’t pay any charges for your investments, but it is often repeated and sometimes even applied in the UK. The realistic UK equivalent of the US 4% rule is the 2.7% rule (this takes account of returns on UK investments, UK inflation and, importantly, typical charges for UK investment portfolios). For most people, that is lower than expected, but there are plenty of ways of improving that figure.

But what happens if the value of your retirement savings falls? In the period between 8th December 2021 and 24th February 2022, the FTSE World Index of global shares fell by 11.25% in Sterling terms, and over the twelve months to 24th March 2022, the FTSE Actuaries All Stocks Gilt Index has lost 7.48%. If you had retirement savings of £1 million in December, it’s quite possible that the same portfolio would now only have a value £900,000. Back in December, your £1million portfolio could have given you £30,000 per year, if your personal safe withdrawal rate was 3%. It would be easy to conclude now that, as that same portfolio has dropped to £900,000, you should reduce your starting withdrawal to £27,000. For some people, that difference would mean that they might no longer be able to retire.

But something feels instinctively wrong with this conclusion. If you had retired in December with £1m, it’s unlikely that your retirement planner will be telling you to dust off your briefcase and get back to work!

And here is why that conclusion would be wrong. Safe withdrawal rates are based on the assumption that you retire at the worst possible time from an investment perspective (for most people, in the UK, that was June 1947, although if you have a particularly low tolerance of investment risk, it was May 1934). After markets have fallen in value, history has shown that you can increase your withdrawal rate – the safe withdrawal goes up after market falls.  So, the person retiring now with £900,000 should still be able to safely withdraw £30,000 per year.

For someone with a balanced portfolio, there have been times when the potential starting withdrawal rate has been extraordinarily high (12.5% in 1975, 10.5% in November 1920), and these high withdrawal rates have usually been the result of a decade of higher returns following retirement. It’s not unusual for long periods of high returns to follow a market setback (such as the period following the recovery from the Banking Crisis of 2007).

As usual, US academics have looked into this and their conclusion was that, when share prices appear to be low, you can adjust your withdrawal rate upwards. They used Shiller’s P/E 10 ratio, to prove their point (this is a way of working out if share prices are high or low). Their conclusion was that, when share prices are low, you should be able to increase your starting withdrawal rate by around 1%.

It’s important to take personal financial advice before deciding how much to withdraw from your retirement portfolio, as your starting withdrawal rate depends on so many factors which are individual to you.

Philip Wise |

Managing Director and Chartered Financial Planner

This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
A pension is a long-term investment, the value of your investment and the income from it may go down as well as up. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
Past performance is not a reliable indicator of future performance.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future. 

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