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  • Writer's pictureNoel Watson

Is the 4% safe withdrawal rate still valid for UK retirees - part 3?

Updated: May 9


Challenge Fourteen: Assumes perfect investor behaviour

We talked about the impact of costs on portfolio sustainability. Now, we need to talk about the effects of investor (mis)behaviour on retirement outcomes and investigate investor vs. investment returns. Investment returns are the returns that a given portfolio generates, while investor returns are those that the investor actually receives. The difference between investor and investment returns is sometimes known as the 'Behaviour Gap', and as you will see below, measuring this 'gap' can be tricky, and there is no agreement on what it might be.

The Behaviour Gap is caused by investor 'misbehaviour', with common misbehaviours including:

  • Panicking during market falls and selling investments.

  • Chasing fads such as 'hot' tech stocks.

  • Performance chasing by investing with fund managers that have enjoyed strong recent returns.

There are many stories that demonstrate the impact of investor misbehaviour. The problem is that often, it's hard to determine whether they are true! One such story is the infamous Fidelity investment survey, where Fidelity conducted an internal review of customer performance from 2003 to 2013 and determined that those with the best returns were "either dead or inactive". The problem is, no one has been able to verify that story!

Another story relates to legendary fund manager Peter Lynch and the supposed returns for those invested in his Magellan fund. From 1977 to 1990, Lynch returned a compound annual return of 29%, whereas the average investor in the fund returned only 7%. Again, it seems hard to determine where this story came from!

That said, there is evidence to suggest that investors do underperform their investments.

Recall from Challenge Five in part 2 that for every 1% increase in total fees, the SWR reduces by around 0.4%, and you see that a misbehaving investor may be surprised at how unsustainable their retirement spending is!

Challenge Fifteen: Being able to cope with drawdowns

Bengen’s logic assumes investors continue withdrawing money even as their portfolio balance drops in challenging markets. A nervous retiree is unlikely to allow this to happen. But what happens if your pot is depleted in the early years of retirement, yet things would have worked out fine in hindsight?

For example, our 1973 retiree would see their portfolio balance reduce by over 20% two years into retirement. Would they be confident to continue their retirement spending, even though history shows they would not have run out?

Investment drawdowns can be sharp and painful!
Investment drawdowns can be sharp and painful!

Over the longer term, would a retiree be happy to watch their portfolio drift down towards zero without making an adjustment at some point?

Will a retiree watch their portfolio suffer a slow, painful death?
Will a retiree watch their portfolio suffer a slow, painful death?


So far, we have only looked at the challenges for a retiree looking to use Bengen's logic. However, there are many positives to using this approach.

It's easy to implement

This can only be a good thing, especially as our financial literacy declines with age.

Financial literacy declines as we age.
Financial literacy declines as we age.

Bengen's approach doesn't require any expensive and sophisticated modelling tools that can have a steep learning curve and might not always be intuitive to use, with many nuances that can catch the infrequent user out.

Future income is known

Assuming a retiree's planning assumptions around longevity, market returns, and inflation are prudent, and they are fortunate enough not to experience investment and inflation in retirement (especially in the early years) that are worse than in historical datasets, they can be reasonably confident that they can withdraw an inflation-adjusted amount from their portfolio each year without worrying about running out of money. They don't need to make adjustments depending on whether the market has performed well or not.

Does not require complicated ongoing monitoring

Other than checking what inflation has done on an annual basis, we do not need to worry about issues such as:


In these three articles, we have reviewed Bill Bengen's seminal work and evaluated taking inflation-adjusted withdrawals from a portfolio over fixed timeframes. While Bengen's work was (and still is) considered groundbreaking, there is an argument as to whether it should be considered more as an academic exercise rather than something that should be used for real-world retirement planning.

In the next article, we look at the Guyton-Klinger withdrawal-rate guardrails.

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.

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