Is the 4% safe withdrawal rate still valid for UK retirees - Part 1?
- Noel Watson
- May 29
- 9 min read
Updated: Jun 11
The nastiest, hardest problem in finance
Nobel Prize-winning professor William Sharpe once called it the "nastiest, hardest problem in finance". He was talking about retirement planning, with the three future unknowns:
longevity;
inflation;
investment returns
making for a complex answer to what, on the face of it, seems like a simple question:
“Will I/we run out of money before I/we die?”
William Bernstein, a financial theorist and neurologist, had this to say:
"No one in his right mind would walk into the cockpit of an airplane and try to fly it, or into an operating theater and open a belly. And yet they think nothing of managing their retirement assets. I've done all three, and I'm here to tell you that managing money is, in its most critical elements even more demanding than the first two.!"
Pensions Freedoms
The challenge of creating a sustainable retirement income is a relatively recent one for UK retirees. In the 2014 Budget, Chancellor George Osborne announced radical pension freedoms, which came into force in 2015, allowing retirees to access their Defined Contribution pensions flexibly from the age of 55 without incurring tax penalties. Before pension freedoms, most retirees purchased an annuity, which had become less attractive due to falling annuity rates.
These freedoms haven't always led to positive client outcomes, with more than £30m lost to pension scammers between 2017 and 2020. The problem seems to be getting worse, with an estimated £17.7m lost in 2023 alone. Furthermore, according to FCA data, around 40% of regular withdrawals were taken at an annual rate of over 8% of the pot value, which many consider unsustainable.
The '4% rule'
A popular 'rule of thumb' is that you can safely take an inflation-adjusted 4% from your pensions and investments each year (far lower than the 8% mentioned above) without running out of money in retirement. How might this rule apply to a UK-based retiree? Let's start by looking at the work of the man who undertook the original research!
William "Bill" Bengen
After studying aeronautics and astronautics at MIT, Bill Bengen worked in his family's bottling business before pursuing his CFP certification and launching his financial planning business. In 1994, Bill published a landmark paper in the Journal of Financial Planning named 'Determining withdrawal rates using historical data'.
Bengen analysed historical market returns from 1926 and determined the highest withdrawal rate as a percentage of the initial investment pot that a retiree could withdraw each year, adjusted for inflation in subsequent years, without running out of money over a thirty-year retirement. He named this the Safe Withdrawal Rate (SWR) and found that the SWR was around 4% for his dataset.
An example is shown below:
Starting pot: £1,000,000
Withdrawal in year one: £40,000
Inflation at the start of year two: 2%
Withdrawal in year two: £40,800 (£40,000 * 1.02)
Inflation at the start of year three: 3%
Withdrawal in year three: £42,024 (£40,800*1.03)
Repeat the process every year until the 30-year mark is reached.
Challenges
It's worth noting that Bengen never claimed that the 4% SWR was a rule, something he believed was invented by the media, according to an interview with Michael Kitces conducted in 2020. We will explore reasons why this 'rule' should not be taken as gospel, breaking our analysis down into three parts:
Data challenges of the 4% rule (this blog post)
Investor challenges of the 4% rule.
To further investigate the '4% rule', we will use example clients David and Samantha Smith. David Smith is 60 and has recently retired from ABC Chemicals. His wife Samantha is 55 and also retired. Together, they have a retirement portfolio of £1,000,000 and are looking for a sustainable income of £40,000 per annum.
To simplify the example and help illustrate the key points, we will make the following initial assumptions:
Neither David nor Samantha will receive a state pension;
Taxation and taxation optimisations are ignored;
They do not plan to gift to their children or leave a legacy;
They are not expecting any inheritances;
They do not want to plan for potential care home fees;
They are not planning to downsize;
They are keeping expenditure assumptions simple. For example, they have chosen not to differentiate between early and late retirement spending;
They do not plan to purchase a secure income (e.g., an annuity) at any stage.
They have a 30-year retirement horizon (i.e. David dies at 90 and Samantha at 85).
They are paying no fees.
David and Samantha will be following the strategy outlined above, with a starting withdrawal of £40,000 (4%) in the first year. We will be using a tool called Timeline, which is used by many financial planners specialising in retirement planning. Timeline uses historical market returns across broad asset classes and inflation data to provide a range of outcomes. For example, had (older versions of) David and Samantha retired in September 1962, Timeline shows whether they would have run out of money before September 1992, given their planned portfolio, withdrawals and retirement horizon (30 years). However, the outcome would have been slightly different if they had retired a month later (due to differing inflation and market returns in the two non-overlapping months - September 1962 and October 1992). By analysing hundreds of such historical outcomes (twelve per year multiplied by the number of available years), we can obtain valuable insights into the future potential outcomes which David and Samantha might reasonably expect. We have used Timeline since 2018, and readers of Noel’s book, 'Planning for Retirement: Your Guide to Financial Freedom' will recognise the concepts and diagrams (and David and Samantha!).
Challenge One: The 4% “rule” doesn’t necessarily hold for UK retirees
Bengen used US historical data for his original work, examining outcomes for a range of portfolios consisting of 0% to 100% large-cap stocks in 25% increments, with the remainder comprising intermediate-term bonds. He found the sweet spot to be between 50% and 75% stocks.
“Sorting this all out, I think it is appropriate to advise the client to accept a stock allocation as close to 75 percent as possible, and in no cases less than 50 percent. Stock allocations lower than 50 percent are counterproductive, in that they lower the amount of accumulated wealth as well as lowering the minimum portfolio longevity. Somewhere between 50-percent and 75-percent stocks will be a client’s “comfort zone.”
We will start with a portfolio consisting of 50% developed market stocks and 50% global bonds and adjust our annual withdrawals using historical UK inflation rates. This portfolio differs slightly from our "No Brainer" portfolios as it excludes emerging markets stocks, but we believe it is adequate for comparison purposes. As a reminder, we will use a 30-year retirement horizon (i.e. David dies at 90 and Samantha at 85).
As can be seen from the screenshot below, the news appears less favourable compared to Bengen's research, with David and Samantha only able to take out a maximum initial starting withdrawal of £33,500 (3.35%) in the first year (see the red bar in the screenshot below) without risk of running out of money further down the road versus around 4% for the Bengen analysis. However, it's worth noting that this worst case occurred in 1915, before Bengen's 1926 start date. If we were to constrain our analysis to the 1926 start, our worst case in this more limited dataset is our (unfortunate) 1968 retiree, with a safe withdrawal rate of 4.01%.
Put another way, taking out 4% could see the money running out after around 21 years in the historical worst-case example, nine years short of the thirty-year retirement horizon.
It’s worth mentioning that readers of Noel’s book may see slight differences in SWR rates and worst historical times when compared to the analysis in this blog. For example, the book reports a worst-case SWR of 3.42% occurred in the late 1960s, whereas, in this example, we have 3.35% for the 1915 retiree. Timeline has periodically altered and improved its data, which mainly explains the differences.
It’s worth emphasising that retirement planning is not an exact science, a point we will revisit (again and again!), and there is always the potential for differences in historical analysis:
Variations in asset class returns used: The original Bengen study focused solely on the US; our analysis expanded this to include developed markets. Bengen published subsequent research in 1996, adding small-cap stocks to the original two asset classes (large-cap stocks and intermediate-term bonds). He found an increase in the safe withdrawal rate (up to 4.3%) but cautioned that this might not be the case in the future.
Different periods analysed. See Challenge 3.
Country-specific inflation. For example, the UK experienced particularly high inflation during the 1970s and the First World War.
Challenge Two: Asset allocation of 50% stocks and 50% bonds
In Challenge One, we used a portfolio of 50% developed market stocks and 50% global bonds. Real-world portfolios may differ from this. For example, if we increase the equity content of the portfolio from 50% to 60%, the SWR increases from 3.35% to 3.48%, and the money lasts for an additional few years in the worst-case scenario. Conversely, if we reduce the stock content to 30% (and therefore, our portfolio contains 70% bonds), our SWR is now down to 3.06%, and the worst-case scenario shows the money running out after approximately 17 years.
Note that it's not just the stock-bond split in the portfolio that can impact our SWR but also diversification (or lack thereof). If we use 100% US market stocks for our portfolio rather than the more diversified developed markets/global bond portfolio, the safe withdrawal rate reduces slightly from 3.35% to 3.26%. This outcome emphasises the importance of diversification (both in terms of asset class and geography) and not having all of your eggs in one basket. The current bestselling ETFs on popular retail investment platforms suggest that many retail investors may not consider this important.
Challenge Three: Limited historical data
Bengen published his paper in 1994, and his analysis covered the period from 1926 to 1992, a span of just 66 years. However, it’s worth pointing out that Bengen wouldn’t have known how, for example, the 1970 retiree would have fared as he didn’t have a full 30 years of retirement data when he wrote the paper in 1994.
Over thirty years have passed since Bengen’s original work, and, as discussed, Timeline has data going back to 1915 (which coincided with the worst historical year to retire in the dataset), meaning that we now have nearly 80 years of retirement data available (Timeline currently goes to the end of 2023, so our "latest" retiree for a 30-year retirement would be someone finishing work in 1993). While 80 years of retirement data might seem a lot, it is not even three of our 30-year retirements used for our analysis. We may encounter market conditions in the future that are far worse than those reflected in our historical data. For example, Morningstar research suggests that a sustainable withdrawal rate closer to 3% may be more appropriate due to elevated valuations. (Of course, safe withdrawal rates can only be determined in hindsight, so it's always worth bearing this in mind when reading predictions!).
As historical market data continues to improve in terms of quality (cleaner data with fewer errors) and quantity (historical data extending further in time), it can cause us to question our beliefs. For example, recent research by Edward McQuarrie has challenged the assumption that many investors hold, namely that stocks consistently outperform bonds over the long term. McQuarrie's research again emphasises the point we covered in Challenge One that the data we use for our retirement modelling may well be revised in the future.
Challenge Four: Starting stock market valuations are not taken into account
Picture the scene: David and Samantha retired in 2025 and started drawing down their investment pot at the rate of 3.3% (£33,000), using a portfolio of 50% stocks and 50% bonds. Based on historical data, they are reasonably confident they can continue to take inflation-adjusted withdrawals from their portfolio over the next 30 years without running out of money.
Fast forward two years to 2027. Another couple, let's call them Mark and Rebecca Jones, have identical investments and expenditure plans and are planning their retirement. Their investment pot, which was at the same £1m as the Smiths in 2025, is now valued at £850,000 after the market slump of 2026. They now feel they can only spend around £28,000 (3.3%*£850,000) without running out of money due to the lower starting investment balance
.
This paradox was described by leading US financial planner Michael Kitces in a 2008 publication. Bengen built upon Kitces' research in a 2020 article, suggesting higher initial withdrawal rates (albeit with a smaller starting pot) should be considered due to lower (better) asset valuations (as you might expect after market falls).
In part two of this series, we look at the real-world challenges of the 4% rule.
Want to find out more?
If you want help with building a robust retirement plan, please get in touch.
About us
The team at Pyrford Financial Planning are highly qualified Independent Financial Advisers based in Weybridge, Surrey. We specialise in retirement planning and provide financial advice on pensions, investments, and inheritance tax.
Our office telephone number is 01932 645150.
Our office address is No 5, The Heights, Weybridge KT13 0NY.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Comments