How can I make my retirement savings last?
We know it can be hard to work out how much to take from your pension when you retire. After all, you want to enjoy yourself and make the most of your hard-earned savings, but they also need to last throughout your retirement. We have some ideas to help you with this difficult decision.
Important Information - the value of investments and the income from them can go down as well as up so you may not get back what you invest. You cannot normally access money in a pension until age 55 (57 from 2028).
Important information, before you read on
The figures quoted in the infographics below use generic assumptions and estimations designed to give some simple rules of thumb to help you look into your retirement savings journey and beyond. The figures are not personalised to you. They are based on average household incomes in the UK with typically two working adults and two state pensions. The assumptions we use may not represent what actually happens in the future - because no-one knows that. This article should, therefore, not be used as a detailed retirement plan or act as a replacement for professional advice.
Read more about our assumptions here.
How can I make my retirement savings last?
- Your money needs to last throughout your retirement, which can last 25 years or more
- A good rule of thumb is to take no more than 5% of your household savings in the first year of retirement
- You can then adjust this figure based on a range of factors, such as your retirement timeline and how confident you want to be that your withdrawals are sustainable
Our research1 shows that a potentially sustainable rate is to withdraw between 4% and 5% of your household retirement savings in the first year of your retirement – and then adjust that amount every year for inflation.
However, it’s important to remember that this is just a rule of thumb. For example, you might want to withdraw more in the early years to spend on home renovations or travel. You would then need to withdraw less in the later years.
The graphic below shows how this could work, if you are looking for a steady amount of income from your retirement savings. This will give you a starting point which can be adjusted annually for inflation.
1 Fidelity International’s Retirement Savings Guidelines white paper. November 2018.
Making your money last in retirement
The Smith's have £180,000 in retirement savings and plan to retire at age 68. This shows how much they may want to withdraw each year.
How we do our retirement saving guidelines calculations
The rules of thumb do not take into account the product that your savings are in - whether you are saving in an ISA, or a pension, or anything else. In particular, this means that it does not take into account limitations or tax treatments of individual investment products. In particular:
- It does not take into account the Lifetime Allowance on the overall value of your pension savings.
- It does not take into account the Annual Allowance or Earnings Cap limiting the amount that you can contribute to a pension.
- It does not take into account tax relief on pension contributions, or any additional tax due on the income taken from those pensions.
The rules of thumb are based on an assumption that people invest in a diverse portfolio of different assets including some stocks and some bonds. Your own investments might carry more or less risk than what we have assumed, which will change your expectation of returns. In particular, if you have a high proportion of investments in a single business or property, our forecasting assumptions are unlikely to be relevant.
The rules of thumb presented in this article are based on a set of generic long-term assumptions for investment returns because we do not know when in the future you might be retiring. It does not take into account our current view of potential investment returns in the short term, and therefore if you are within a few years of retirement these rules of thumb are likely to be less appropriate for you. If you are close to retirement and want to understand more about your potential retirement income using drawdown or an annuity you may contact Fidelity’s retirement service on 0800 368 6882.
- We assume that prices rise at 2% each year - meaning that the income you take must also increase at the same rate to avoid a drop in your spending power over time.
- We assume that you have a life expectancy based on ONS National Life Tables; your actual life expectancy will vary depending on your age, your gender and whether we are planning on a joint basis or for an individual.
- We assume that you invest in a mixed portfolio of investments. We can provide more information about the underlying assumptions in the Detailed Investment Assumptions section below.
- We assume that household income is gross annual income (i.e. before tax).
There are two ways of generating an income from your retirement savings - purchasing an annuity, or drawing down from capital. This article is about what income you could potentially sustain, based on certain assumptions, if you choose to draw down. This means that you are taking a small amount of money out of your savings each year to provide yourself with an income, while the balance of your savings remains invested. There is a risk that you could take an income that is too high - and so run out of money before you die - that will depend on how much you take, and how your savings perform in retirement. We need to forecast how your savings might perform in retirement - see investment assumptions below.
Note that this analysis does not take into account the limitations or tax treatments of individual investment products, such as your tax free cash lump sum, or the tax due on any remaining income.
Detailed Investment Assumptions
- We assume that you invest in a portfolio containing 25% equities.
- In order to select an investment return for your investments before retirement, we ran a forecast looking at the potential range of different results this portfolio might get and how likely they are. From this range of results, we chose an outcome that you could expect to see 80% of the time or more based on the assumptions used in the forecast - under this scenario, your investments are assumed to grow at an average rate of 4.75% each year (or 2.75% above inflation) over those 43 years before you retire.
- In order to select an investment return for your investments after you retire: we ran a forecast looking at the potential range of different results this portfolio might get and how likely they are. From this range of results, we chose an outcome that you could expect to see 90% of the time or more based on the assumptions used in the forecast - under this scenario, your investments are assumed to grow at an average rate of 4% each year (or 2% above inflation) for the rest of your life.
However, it is important to remember that this is just a starting point. There are a couple of other factors that will play a role in working out the right withdrawal rate percentage for you.
1. Take your retirement timeline into account
One of the biggest factors in planning your retirement savings is how many years of retirement you plan to fund with your retirement savings. We have assumed a retirement age of 68 and a retirement timeline of 25 years and our calculations show that a withdrawal rate range of 4.1% and 4.4 % is potentially sustainable in at least 90% of the projected scenarios, as illustrated in the graphic below.
If your retirement age is later than 68, then your withdrawal rate could be higher and similarly, if you want to retire earlier and you are planning for a longer retirement then your withdrawal rate could be lower. These may sound like small differences, but they could equate to a meaningful difference in annual retirement income.
The longer your retirement, the lower your withdrawal rate should be, to make your money last
2. The degree of probability in our calculation projections can be important too.
The degree of probability that your money will last your lifetime influences the calculations and the amounts of money needed in retirement savings.
As the graphic below illustrates, in 50% of our hypothetical scenarios, a withdrawal rate of 5.7% was shown to be sustainable over a 25 year retirement period. However 50% may be regarded as a low probability. We decided to choose a range of between 4% and 5% as our rule of thumb because it was shown to be sustainable in 90% of hypothetical situations. The graphic below illustrates the variation of the sustainable withdrawal rate in line with changes in the probability of the calculations.
The higher the probability of the retirement savings being sustainable, the lower the recommended withdrawal amount
So, to summarise, it is important to consider sustainability from different perspectives – your assumed retirement length and the probability of the savings being sustainable. Read more about our assumptions here.
Important Information - pension and retirement planning can be complex, so if you are unsure about the suitability of a pension investment, retirement service or any action you need to take, please contact Fidelity’s retirement service on 0800 860 0048 or refer to an authorised financial adviser of your choice.
Get support with your plans
There are some big decisions to make at retirement and understanding how much to take from your pension to support the lifestyle you want, isn’t always easy. If you need support, our retirement specialists are on hand to help.
You can call us on 0800 860 0048. We’re open 9am to 5pm, Monday to Friday.
You may also want to contact the Government’s free and impartial Pension Wise guidance service which can help you understand your options at retirement. You can access their guidance online at moneyhelper.org.uk or over the telephone on 0800 138 3944.
More from Fidelity
An essential read on everything you need to know about drawdown.
Free drawdown access to your pension with our award-winning SIPP. Normal SIPP and fund fees apply.
Talk to a retirement specialist if you are thinking about accessing or moving your pension(s).