Your retirement number: understanding safe withdrawal rates

What a safe withdrawal rate actually means

A starting withdrawal rate is the first year’s withdrawal divided by the portfolio value at retirement. Under the classic approach, that first cash amount is then increased with inflation each year rather than recalculated as the same percentage of the changing portfolio.

With a £750,000 portfolio and a 4% starting rate, the first withdrawal is £30,000. If inflation were 3%, the following year’s planned withdrawal would be £30,900—even if the portfolio had fallen.

This is not the same as interest. The withdrawal can come from dividends, bond income, cash or selling investments. If returns fail to cover it, part of the original capital is being spent.

How the 4% rule became famous

US research by William Bengen, followed by work commonly called the Trinity Study, examined how stock-and-bond portfolios would have survived different historical retirement dates. The now-famous rule of thumb was to withdraw 4% of the starting portfolio in year one, increase that cash amount with inflation and plan around a 30-year retirement.

Turning 4% upside down produces the ‘rule of 25’: multiply the annual amount required from the portfolio by 25.

The calculation is wonderfully simple. The evidence underneath it is not.

Why ‘safe’ is the dangerous word

The historical studies did not discover a law of nature. They tested particular US assets, portfolio mixes, inflation histories, withdrawal rules and time periods. A result described as successful generally meant that the portfolio had not reached zero by the end of the chosen period. Finishing year 30 with £1 still counts as success in that narrow test.

A UK retiree may hold global assets, pay different fees and taxes, experience UK inflation and need the money for longer than 30 years. Someone retiring in their forties or fifties could be planning across four or five decades. No single percentage can absorb every one of those differences.

Using 3.5% instead of 4% creates a larger starting cushion, but it does not create a guarantee. A cautious-looking percentage combined with very high fees, concentrated investments, inflexible spending or an unusually long retirement can still fail.

The withdrawal rate is an assumption to stress-test, not a permission slip to stop thinking.

The risk that averages hide

Two retirees can earn the same average return and have completely different outcomes. The order of those returns matters because withdrawals continue while markets move.

Imagine a £500,000 portfolio intended to provide £20,000 in the first year. If markets fall 25%, its value drops to £375,000 before the withdrawal. Taking £20,000 now removes 5.3% of what remains, and investments may need to be sold at depressed prices. There is then less capital available to participate in any recovery.

The same fall late in retirement may be less destructive because earlier growth has had time to build the portfolio. This is sequence-of-returns risk: poor results near the start can matter far more than the same poor results near the end.

MoneyHelper makes the practical point clearly: taking money while markets are low can leave fewer investment units to recover later. Reducing withdrawals after falls, holding some near-term spending in less volatile assets and reviewing the plan regularly can help, although every buffer carries its own cost and none removes risk.

Your target is based on the gap—not your entire lifestyle

The common £30,000 × 25 example assumes the investment portfolio must fund every pound. Many UK households will also have State Pension income, defined-benefit pensions, annuities, rental income or some continued earnings.

The full new State Pension is £241.30 a week in the 2026/27 tax year—about £12,548 a year before tax. The actual amount depends on your National Insurance record, so use your forecast rather than automatically assuming the full rate.

Suppose planned spending is £30,000 and the full £12,548 is eventually available. The portfolio gap after the State Pension begins is approximately £17,452. That implies about £436,000 at 4%, £499,000 at 3.5% or £582,000 at 3%.

That is a much smaller number than £750,000—but it is not the whole plan. Someone retiring before their State Pension and workplace pensions begin needs a bridge for the years in between. Money inside a pension may also be inaccessible when an early retiree first needs it, which is why ISAs, cash and pensions must be mapped by date rather than added into one impressive total.

Build your first estimate

Enter the annual spending you want, subtract reliable annual income and test several starting withdrawal rates. The result is a target for the portfolio-funded gap, not a forecast that the portfolio will survive.

Be consistent about tax. If your spending figure is after tax, the income and withdrawals used to fund it also need to be considered after tax. Pension withdrawals can be taxable, while ISA withdrawals are generally free of UK Income Tax and Capital Gains Tax. Fees should be included somewhere in the assumptions rather than quietly ignored.

What makes a retirement plan more resilient

A robust plan is not simply a bigger number. It has more than one way to respond when reality refuses to match the spreadsheet.

• Separate essential spending from discretionary spending. Holidays and upgrades can be adjusted more easily than housing, food or care costs.
• Map reliable income by start date. State Pension, defined-benefit pensions and annuity income can reduce the amount exposed to market withdrawals.
• Test longer lives and ugly early markets. A plan that works only when returns arrive smoothly is not a plan for real markets.
• Include fees, tax and inflation. Small annual deductions become significant across a retirement lasting decades.
• Decide how withdrawals could change. Freezing an inflation increase or temporarily reducing discretionary spending can protect capital after poor returns.
• Review at least annually. Spending, health, tax rules, investment values and family circumstances will change.

Guaranteed income can also be valuable. An annuity exchanges access to capital for a defined income, while drawdown retains flexibility but leaves the outcome exposed to investment performance and longevity. The strongest structure may combine different sources rather than demanding that one portfolio do everything.

The bottom line

The 4% rule is useful because it gives retirement planning a starting line. It is dangerous when treated as a finish line.

Calculate the spending gap, not just total spending. Bring State Pension and other reliable income into the right years. Test 4%, 3.5% and lower rates, but also test the risks that the percentage hides: a long retirement, poor early markets, inflation, fees, tax and spending that cannot adjust.

Your retirement number is not one magical figure. It is a range supported by a plan—and a plan should be able to survive being wrong.