The oft-quoted saying ‘your last cheque should be to the undertaker and it should bounce’ sums up the dilemma facing many retirees.  

While people naturally worry about running out of money during retirement, the alternative may be equally concerning (unless it’s a conscious decision to leave a significant legacy, which may be the case for wealthier clients).  

This raises the question of what is the maximum sustainable withdrawal rate? The answer differs from one person to another, but there is some general guidance. The foremost analysis in this area is by the US financial adviser, William Bengen. Bengen suggested that 4%, adjusted for inflation each year, should provide an income for life.

Recently, this figure has been challenged. Morningstar Research suggests that nearer 3% is a more realistic figure these days for UK retirees. For many people, this may be inadequate, so what can influence this figure?

  • Inflation. A level income would allow for a higher withdrawal rate. There is a logic to this because expenditure often decreases over time.

  • Legacy. If leaving a legacy isn’t a priority, this may provide scope to consider a more ambitious withdrawal rate.

  • Backstop. If people have other assets that could be used if money ran out, like property equity, this could allow for a higher withdrawal rate to be taken.

  • Stock allocation. All the evidence suggests that over the long term portfolios with high levels of exposure to equities do better and can support a higher withdrawal rate.

  • Health and lifestyle. A client with a serious medical condition or lifestyle that is likely to shorten their life expectancy might choose a more aggressive withdrawal rate.

  • Guaranteed income. If clients accept that expenditure is likely to decrease over time or if they have a final salary pension and state pension (both of which are likely to protect against inflation), a level annuity could provide an income of more than 5% each year.