How much income should you take in retirement?

 In Parkgate Blog, Pensions and Retirement Planning

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Why this is the “single, nastiest and hardest” problem in finance!

When you start your retirement journey and begin taking income from your savings, you will need to decide how much income you can afford to regularly withdraw to balance the best possible lifestyle against the need to make sure that your money will last longer than you do.

This is called the “safe withdrawal rate” and has been described as the “single, nastiest and hardest problem in finance” by no less than Nobel Prize winner and Stanford Finance Professor, William Sharpe.


Two significant variables in the calculation which you will already be familiar with are:

  1. Inflation – your savings will be continually eroded by inflation with the reduction in purchasing power potentially very significant over say a 30-year period.
  2. Longevity – we would all like to benefit from increasing life expectancy, but the risk of living for at least 30 years after retirement is the strain it will put on your savings as they struggle to last as long as you do.

A third variable is much less well known, but it could be argued that it is the biggest one of all. It uses some very basic maths and is called “the sequence of returns”.


As an example, if you start an investment with £10,000 and imagine two sets of investment returns applied over say a 5-year period. The returns are identical, they are just applied in a different order. If no money is withdrawn from the original amount then it doesn’t matter in what order the returns are experienced, the investor has the same capital amount at the end of 5 years. See Table A below.

If however you withdraw £2,000 from the fund at the beginning of each year, the sequence of returns makes a significant difference to the capital remaining after 5 years. This is because the fund is at its highest at the outset and therefore benefits or suffers disproportionately when it experiences good or poor returns. Good or poor performance towards the end of the period has a lower impact on the smaller amount of capital. See Table B below. 

So, having got the maths out of the way, why is sequence of returns such an important factor and why does it make the calculation of a safe withdrawal rate so difficult?

Although long term investment returns are fairly predictable over say a 10 year period, the order in which these returns will occur is far more difficult to predict. This means that somebody starting regular withdrawals in retirement begins a “random walk” of say 30 years without knowing in what sequence they will experience the highs and lows of investing.

It is the continual juggling of variables such as inflation rates, the levels and sequencing of investment returns and how long we are likely to live that makes the correct withdrawal rate such a hard and nasty problem requiring expertise and the right tools.

Much of the success of a retirement income strategy can be down to the luck of the draw as to what market conditions you encounter and most crucially when.


You can visualise your financial future with a cash flow model.

We use cash flow modelling tools in our financial planning service, which allow us to create a variety of scenarios with a range of variables that reflect different investment returns, levels of inflation and longevity assumptions, until we find a scenario you are comfortable with.

Once we’ve created your model, it’s important to revisit it regularly, to maintain and update it with all the inevitable changes that will occur including your own sequence of returns.

The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.

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Gareth Higton
Specialising in financial planning, investments, pensions and retirement planning, Gareth has been helping his clients meet their lifetime financial objectives since 2010, gaining a huge amount of experience working with many different types of clients.