Investors expect to take ‘10.3%’ a year from retirement savings

Investors believe they will be able to withdraw, on average, 10.3% a year from their retirement savings without running out of money, according to a new global study.

The figure is far higher than long established guidance on how much to take each year to pay an income. In the US, for example, the “4% rule” has been the basis for financial planning in recent decades, although some experts now deem a 4% withdrawal rate to be too high.

The finding was part of the Schroders Global Investor Study 2019, which gauged the views of more than 25,000 investors in 32 locations around the world.

Sangita Chawla, Head of Retirement Savings at Schroders, said: “To see such a high average figure for withdrawals in this market environment was alarming.

“Our calculations [see below] show that a 10.3% withdrawal rate could deplete a retiree’s savings in a decade.

“So why are investors being so bullish? It could be that too many people are underestimating how long they might live. Consider that global average life expectancy for 65-year-olds has risen from 80 to 82 in the past decade, according to United Nations data.

“Although this differs from men to women, and is likely to increase further in the future, it’s the less developed countries that are ageing most rapidly.

“It’s also possible that people are being more bullish about the amounts they plan to withdraw because they have other sources of income or wealth to rely on.

“These factors aside, it’s fair to say to calculate how long savings can last is not an easy calculation, particularly as you need to factor in inflation, fees and the variability of investment returns. We would always recommend seeking professional help from a financial planner or adviser.”

How long will my savings last in retirement?

The “4% rule” emerged in the early 1990s. From retirement savings of $100,000, an investor would  draw $4,000 a year, with the withdrawal rate rising with inflation each year. Taking more than this runs the risk of the money running dry within 30 years, according to the rule.

The chart below, based on Schroders analysis, shows the effects of a withdrawal rate of 10.3% on a portfolio.

Consider investing in a portfolio that aims to generate a real return (after inflation) of 4% per year. After allowing for fees of 1% per year, a retiree would run out of savings in ten years.

For the average retiree living twenty years and wishing to withdraw 10% per year, the same $100,000 would need to be invested in assets that returned 10% per year (after fees and inflation).

It is not only highly unlikely that the retiree would want to take this level of risk, it is also difficult to find portfolios that can deliver this level over a twenty-year period.

To cover a more realistic length retirement of around 20 years, an annual return of 10%, after costs and inflation, would be needed.

The road to ruin: How long will your savings last?

Source: Schroders. Model assumes a constant inflation rate of 2%. Annual withdrawals of 10.3% of original investment, growing at the rate of inflation. Investment rates illustrated net of fees. Time to ruin illustrated as the number of years before investment is worth zero, without additional contributions. This chart is for illustrative purposes only, and should not be relied upon to predict any possible future performance or when adopting any individual investment strategy

Read more: What is a safe amount to take from a pension?

A geographical breakdown

The 2019 Schroders Global Investor Study also highlighted geographical disparities, concerning the average proportion investors feel they can take out of their retirement savings each year and not run out of money. Investors in India had the highest average (15.0%); Japanese investors had the lowest (7.3%).

Regionally, Asian investors (10.8%) had the highest average. Europe (9.8%) was the lowest, while it was 10.4% in the Americas.

A table with the full list of locations and the amounts they think they will be able to withdraw in retirement can be found below.

Schroders’ Sangita Chawla said: “It should be considered that interest rates are higher in some countries, such as India, and that investors might expect better returns.

“But the withdrawal rates look very high around the globe, especially when you consider the lowest rate of withdrawal was a little over 7%.

“That should really set the alarm bells ringing, particularly when real interest rates are negative in developed markets. And while real rates have been higher in some emerging economies, these rates have been falling as well.”

How much do you think you can withdraw per year in retirement?

In April 2019, Schroders commissioned Research Plus Ltd. to conduct an independent online survey of 25,743 people who invest in 32 locations around the world, including Germany, Australia, Brazil, Canada, China, Spain, the United States, France, India, Italy, Japan, the Netherlands and the United Kingdom. This research defines "investors" as those that will invest at least 10,000 euros (or its equivalent) in the next 12 months and that have made changes in their investments in the last 10 years.