In our last newsletter, we explored the bucketing strategy – a practical approach we apply with clients as they approach retirement or enter what we call the ‘drawdown’ phase. This week, we’re addressing a question that’s top of mind for many: how much can you safely withdraw in retirement?

At Future Gen, we work with individuals at different stages of their financial journey – those still building toward financial independence, those nearing retirement, and those who have already retired. A key part of ensuring peace of mind in retirement is having clarity on how long your money will last.

Many people want to avoid becoming financially dependent on the next generation, and understandably so – our children and grandchildren face plenty of their own challenges. At the same time, relying on government support isn’t a comfortable or reliable option for most. Add to this the reality that people are living longer and want to maintain their quality of life, and it’s clear that planning for retirement income is more important than ever.

The Problem with Online Tools
While there’s no shortage of calculators, apps, and tools available online, we often find that they can lead to more confusion than clarity. Rather than empowering people to spend confidently, they can create anxiety, and in many cases, people end up being overly cautious. They delay or forgo spending on things that are meaningful to them, simply out of fear that they might run out of money.

Understanding How Spending Changes in Retirement
One of the biggest misconceptions about retirement is that your income needs will continue to increase steadily with inflation for the rest of your life. In reality, retirement typically unfolds in three distinct stages, and your spending patterns evolve accordingly.

The ‘Go-Go’ Years
This is the active phase of retirement, typically the first 5 – 10 years. You’re in good health, full of energy, and finally have the time and freedom to enjoy travel, hobbies, and other experiences. Spending in this phase is often higher than expected, but it’s important to remember that this stage doesn’t last forever.

The ‘Slow-Go’ Years
As time passes, energy levels change, and travel becomes less frequent and more local. People often settle into a more relaxed routine, and as a result, expenses tend to decrease, sometimes by 15 – 20%.

The ‘No-Go’ Years
Eventually, many people move into a quieter stage of life. Travel and activities become more limited, and overall spending continues to decline. For some, this becomes a time to support loved ones – what we affectionately call ‘giving with a warm hand.’

These observations come from more than 30 years of working closely with clients, rather than from a formal academic study. But they reflect a consistent pattern we’ve seen time and again: spending in retirement tends to follow a series of plateaus, not a straight, upward line.

One more point we believe strongly in: owning your home is essential for long-term financial security in retirement. Having a roof over your head without the uncertainty of renting is a cornerstone of financial peace of mind.

So, What’s a Safe Annual Withdrawal?
Let’s look at a widely referenced approach: the ‘4% rule,’ introduced by retired U.S. financial planner Bill Bengen in 1994. I had the opportunity to hear him speak at a U.S. financial planning conference in 2004, where he explained what he called ‘SAFEMAX’ – the maximum historically safe withdrawal rate.

Based on historical U.S. market data from 1926 to 1990, Bengen concluded that retirees could safely withdraw 4% of their portfolio in the first year of retirement, adjusting that amount each year for inflation, and still have their money last at least 30 years even during challenging economic periods like the Great Depression.

For example, someone retiring with a $1 million portfolio would withdraw $40,000 in their first year. If inflation were 2%, they’d increase that to $40,800 the following year, and so on. This strategy assumes a balanced portfolio – typically 60% equities and 40% bonds – to provide both growth and stability.

Important Caveats
While the 4% rule is a helpful starting point, it’s not a perfect solution for everyone. Some of its limitations include:

• It doesn’t account for a market downturn early in retirement.
• It assumes retirees never adjust their spending, even when circumstances change.
• It overlooks one-off costs, such as replacing a car or dealing with unexpected health issues.
• It doesn’t reflect the changing spending needs across the Go-Go, Slow-Go, and No-Go phases.

Making It Personal
That’s why we recommend customised scenario planning for anyone approaching retirement. Here’s what that might involve:

• Financial modelling that incorporates one-time expenses, market corrections, legacy goals, and the realities of your retirement lifestyle.
• Using the Three Bucket Strategy, which helps manage risk and provide stable income over time. To catch up, please click here.
• Remaining flexible. Being willing to adjust your withdrawals during market downturns can significantly improve your chances of long-term success.

A Practical, Not Perfect, Rule
Bengen’s 4% rule provides a reasonable framework, but it’s just that: a framework. Retirement is deeply personal, and no single rule can account for all the nuances of your financial situation and lifestyle preferences.

With that in mind, we encourage you to take a proactive approach. Run scenarios. Think about what matters most to you.

And remember, you only retire once… it’s worth taking the time to get it right.

With expert guidance at every life stage, we help you confidently navigate financial decisions, from building wealth and securing your financial future to succession planning and legacy protection.