You may have heard of the so-called 4% rule.
This refers to the annual percentage amount that some experts believe it is safe to draw from your savings/pensions in retirement, which is at a level where your money should last well into your nineties. In words, this is known as the Safe Withdrawal Rate (or SWR).
The SWR and the 4% rule interchange because of research work done over many decades by various academics and financial analysts. Most notably by Bill Bengen, a financial adviser in southern California. His research was published in the Journal of Financial Planning in 1994.
In simple terms he used historical data from investing markets to assess probabilities of running out of money in a typical retirement period, based on variable levels of income withdrawals from a starting sum.
His broad conclusion was that if an investor started by withdrawing 4% in year one and then continued with this level every year thereafter adjusting for inflationary increases, they should be safe.
For example, if an investor has savings/pensions of £400,000 to utilise, they could start by taking £16,000 in year one and then inching this higher in year two (to adjust for inflation) and on all known historical pathways, which should mean they would outlive their savings/pensions. Or put another way, they would not run out of money.
That in a nutshell is the basis for the 4% rule and this has guided many financial advisers and investors over the years. It is commonly used as a reliable benchmark.
Trevor Downing FPMI FPFS
