Why there’s no ‘safe’ amount to withdraw from your pension
A client called me recently. He'd done his research, had a figure in his head, and was ready to act. He was going to call Aviva directly and start drawing down from his pension. The number he'd landed on was 4%.
He'd Googled "safe withdrawal rate". That's what it told him.
I was glad he called me first.
Where 4% comes from - and why it's stuck around
The 4% rule has been cited for decades as a reasonable drawdown rate from a retirement pot - the level at which your money is statistically likely to last. It came from research in the 1990s, based on the market returns, interest rates and life expectancy assumptions of that era. It was never meant to be universal. It was a starting point for a specific set of circumstances that no longer exist in the same form.
But it's a clean number, easy to repeat and hard to argue with at a dinner party.
It reminds me of the “10,000 steps a day” goal. That figure wasn't the output of medical research - it came from a Japanese pedometer marketed in the 1960s ahead of the Tokyo Olympics. The name of the device Manpo-kei, roughly translated as "10,000 steps meter," and the number stuck. Decades later, it's still the benchmark most people use, long after the product that invented it has been forgotten.
We like a number - numbers feel like answers, and answers feel like the hard work is done.
Which is why it’s worth remembering that William Sharpe, Nobel Prize-winning economist, described decumulation - the business of drawing down your pension in retirement - as "the nastiest, hardest problem in finance."
So why do we think it can be boiled down to one ‘safe’ number that works for everyone, wherever they are, whatever they want? Safe under what assumptions? Safe based on whose life expectancy, whose spending, whose goals?
I tried asking an AI chatbot directly. The answer was careful and thorough and included phrases like "it depends on your circumstances" and "there's no universal figure”. Which is, of course, entirely correct. And also, for someone who just wants to know how much they can take out each month, a little maddening.
But the maddening part is the point. The nuance isn't the AI hedging its bets. The nuance is the truth.
The greed question
I came across a piece recently by Meghaan Lurtz, an American financial planner and psychologist who writes about the emotional side of money. She tackled greed - not as a character flaw, but as a normal human emotion, one that's more nuanced than we tend to admit. Research suggests that greed is normally distributed across the population. Most of us sit somewhere in the middle, neither consumed by it nor entirely free of it.
What struck me was the question buried underneath all of that: at what point does wanting more cross a line? We all know greed when we see it, but it's hard to spot the boundary in advance. And that's because it's not really a mathematical question. It's a values question.
Which brings you straight back to what 4% can't tell you.
Do you want to preserve your capital through retirement - leave something behind, keep a buffer, never touch the principal? Or do you want to spend it and enjoy it? To put life into your money, as I like to say? Those are completely different strategies. They lead to completely different numbers. And neither of them is wrong - but they're not interchangeable, and a Google search won't tell you which one is yours.
The harder question
Carl Richards, the financial planner and writer, has a technique I like. He asks people to finish sentences without thinking too hard: "The wealthy got wealthy by..." and "Poor people are poor because..." The answers reveal more about someone's relationship with money than any cashflow model.
Financial planning gets a reputation for being about markets, interest rates, tax wrappers. And yes, those things matter - they're part of the job. But the most valuable conversations I have are rarely about products or performance. They're about people: what they want life to look like, what they're worried about and whether they're actually enjoying any of this.
It's perhaps mildly inconvenient for my profession that the best financial planning conversations often end up being about life rather than finance. But that is the point.
Anyone can hand you a number. The harder - and more useful - work is helping you make good decisions about the life you're trying to build.
What my client did
He didn't call Aviva. We had a conversation instead. We talked about what he actually wanted his retirement to look like, what he wanted to spend, what he wanted to leave behind. The number we landed on wasn't 4%. It was right for him, based on his life - not a rule invented thirty years ago for someone else's circumstances.
That's not a criticism of anyone who starts with 4%. It's a reasonable place to begin a conversation. It's just not a good place to end one.
If you're approaching retirement and wondering what the right number is for you, I'd love to talk. Not to give you a figure, but to help you work out what your figure should be.