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I'm trying to create a pension prediction spreadsheet for myself. One of the input variables is going to be the pension withdrawal rate. Looking around the web, I can see that typically folks are recommend to make this in the 3-4% range; for example, Investopedia recommends that. This generally seems to just be a fixed number which doesn't vary according to any other criteria.

However, surely the withdrawal rate should depend on the age at which I retire (which is also an input to my spreadsheet). If I retire early (e.g. 55 rather than the "standard"/state retirement age where I live - the UK - which is 68), shouldn't the withdrawal rate be quite a bit lower to avoid running out of money?

Should I / how can I calculate an appropriate withdrawal rate? If there a standard formula I can use? I've searched the web quite a bit, but I can't find anything appropriate which isn't completely impenetrable except for dyed-in-the-wool professionals.

Andrew Ferrier
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The 4% number is a conservative figure chosen because it's less than typical investment growth rates, so theoretically you are living only on the growth and the money can last "forever".

Actual growth is likely to be higher, but this continuous draw may not account for emergency spending, or the investments may do badly for a while (see comments elsewhere about maintaining a year's reserve in cash form to avoid having to sell low), so the caution is appropriate.

There are tools which will help you model what may happen to your money given some base assumptions. I use the one built into my personal finance program, but your investment agent may offer one or there are others. It's very much a rough guess, since you are trying to predict future spending and income, but it's a good sanity check. Mine reports that, in today's dollars (accounting for also-guessed inflation) my net worth without selling the house should stay basically constant until end-of-life costs, which may wipe out most of that cash. That was my goal when saving for retirement, and I'm quite happy to have hit it.

keshlam
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I've made extensive spreadsheets but they depend a lot on your specific situation, your goals and the underlying assumptions. Factors that are important include

  1. How much money have you invested
  2. How much more will you earn and/or invest before you start withdrawing
  3. What other source of income do you have and when do they kick in (social security, pensions, option, side gig, etc)
  4. What is your assumed rate of return, how well do you deal with risk
  5. What is inflation
  6. How much money do will you be needing and how will this change over time as you grow older
  7. What does your health care situation look like
  8. How long are you and your partner (if applicable) are planning on living.

Turns out that many of these things are either unknowable or very difficult to get even remotely right, so I found the values of these spreadsheets to be fairly limited.

The 4% is just a rough rule of thumb that works in many "normal" cases. You can try to work up an individual spreadsheet, but it's a fair bit of work and since many of the assumptions are shaky, it may not offer more confidence. I found the main value to be the insight that I gained on how things interact with each other and in a "sensitivity" analysis: what are the factors and assumption that matter the most (and you should keep an eye on).

Hilmar
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