Anyone in retirement faces the difficult task of ensuring their money lasts as long as they do. Historical income strategy rules suggested investors could afford to take 4% of your pot each year. Nowadays people are living for longer, so should you aim for a much lower percentage withdrawal?

What is Bengen’s ‘4% rule’?

American financial planner Bill Bengen postulated that retirees with a diversified portfolio (50% in equities, 50% in bonds) should be able to take out 4% of the initial balance, adjusted for inflation, throughout retirement and be confident their pot wouldn’t run out.

He reached this conclusion based on rigorous analysis of historical data, going back to 1926.

Bengen said 4% should, based on historical returns, last for 30 years in retirement. You need to consider around one in three babies born in the UK today are expected to reach their hundredth birthday. That implies retirees in the future might need to take less than 4% annually if the money needs to last for more than 30 years.

Why are people questioning Bengen now?

Bengen’s 50/50 portfolio would have delivered returns in excess of 4% in almost every year between 1926 and 2011. At its peak in 1982, the portfolio’s average yield was 10.6%, according to Vanguard. By 2011 it had dropped to just 2.8%.

Consulant McKinsey last year analysed the markets and said the past 30 years or so had been a ‘golden’ era for investing. It suggested investors would seriously struggle to achieve similar returns over the next 20 years.

Whether the so-called ‘safe’ withdrawal rate is 4%, 3% or even 2% today, the reality is neither Bill Bengen nor McKinsey have a crystal ball. In fact, there’s an argument to suggest the very idea of a safe, no risk level of withdrawals is a dangerous fallacy and you certainly shouldn’t blindly follow such things.

It’s also worth remembering a few years of bad returns at the start of retirement have a hugely detrimental impact on the longevity of your pension pot as early losses are more difficult to recover.

The reality for many retirement investors is that spending will go up and down depending on individual circumstances. Some will want to spend more in the early years and then reduce outgoings as they get older, for example – for these people a Bengen-type rule might be too inflexible.

Ultimately the best way to ensure your retirement pot lasts is to regularly review your investment and withdrawal strategy and, where appropriate, make adjustments so that your spending and investing remain in balance.

Tom Selby, Senior Analyst, AJ Bell

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