Safe Withdrawal Rate
The Safe Withdrawal Rate (SWR) was developed by William Bengen, a US based financial planner and is a method that US retirees use to determine how much they can withdraw annually without running out of money before reaching the end of their lives.
The methodology of the SWR was based on US historical data and attempted to account for periods of inflation and the monthly returns of US asset classes since January 1926.
Bengen was able to construct rolling thirty-year periods via historical simulations and calculate the maximum sustainable withdrawal rate for each rolling historical period.
To ensure that the simulations were as realistic as possible, he included a ‘SAFEMAX’ which is the highest sustainable withdrawal rate for the worst-case retirement scenario in each rolling period. The search for the worst-case scenarios puts the focus on spending conservatively.
Bengen was able to demonstrate that, historically, a 4% initial withdrawal turned out to be a realistic level of withdrawals across most asset allocations. This would later be used as a ‘rule of thumb’ for withdrawal strategies in the US and UK.
However, recent studies by the UK’s Institute and Faculty of Actuaries have advised that this rate should be revised to 3.5% , depending on the age at which the drawdown down begins. Furthermore, this rate of withdrawal will further depend on an individual’s gender, life expectancy, underlying investments and access to additional funds for emergencies.
With regards to an individual’s retirement planning strategy, these guidelines remain useful and can be used to form the basis of discussions concerning sustainability of income; however, income requirements in retirement are often changeable as retiree’s circumstances and spending patterns alter over time.
On this day - 27th April 1992
Betty Boothroyd becomes the first woman to be elected Speaker of the British House of Commons in its 700 year history