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What is a safe withdrawal rate in retirement?

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, 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
  • 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

Your retirement can last 25 years or more, so you need a withdrawal strategy that’s sustainable.

Our research 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.

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.

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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

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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

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So, to summarise, it is important to consider sustainability from different perspectives – your assumed retirement length and the probability of the savings being sustainable.

Please remember that the value of investments and the income from them can go down as well as up so you may get back less than you invest. You cannot normally access your pension savings until age 55. 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 or refer to an authorised financial adviser.

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 www.pensionwise.gov.uk or over the telephone on 0800 138 3944.

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