Safe withdrawal rate calculator

What does a safe withdrawal rate calculator work out?

It answers the two questions people ask once savings have been built: how long will this money last at the income I plan to draw, and how much can I draw if it has to last a set number of years. The first is the headline. The second appears under it as the withdrawal that lasts the years you enter.

The calculator does not decide that any rate is right for you. The phrase safe withdrawal rate is simply the name people search for; on this page every rate is arithmetic on three assumptions you enter, the return, inflation and the timing of withdrawals. Change them and the answer changes.

How long will my portfolio last?

The calculator runs the plan one year at a time. In year 1 it takes the first withdrawal. In each later year the withdrawal rises by the inflation rate, so its buying power stays level. Whatever is left grows at the assumed return. The money lasts as long as the balance can pay each year's withdrawal in full, plus the share of the final one it can still cover.

On the defaults, a $1,000,000 portfolio pays $40,000 in year 1, which is 4%. At 3% inflation the withdrawal has reached $94,263 by year 30. With an assumed 5% return and withdrawals at the start of each year, the money lasts 33.6 years and pays out $2,269,510 in total before it runs dry. After the 30 years set in the horizon field, $343,115 is still left.

The answer is shown to one decimal place. If the balance is still growing after 100 years, which happens when the assumed return comfortably covers both the withdrawals and their inflation increases, the page says so instead of printing a number.

What withdrawal lasts exactly 30 years?

Turn the question around and ask for the first-year withdrawal that runs the balance to zero at the end of the horizon. Because each withdrawal rises with inflation, the answer depends on the real return: (1 + return) / (1 + inflation) - 1, which is 1.94% on the defaults. The first withdrawal is the portfolio divided by the sum of (1.03 / 1.05) raised to the powers 0 to 29, which comes to $43,449, or 4.34%.

The longer the horizon, the lower the withdrawal. On $1,000,000 with a 5% return and 3% inflation, withdrawals at the start of each year:

Each figure empties the portfolio exactly at the end of its horizon, with nothing left over, so a plan that has to leave something behind needs a lower figure.

What does the 4% rule mean for how long money lasts?

The 4% rule is a widely used rule of thumb: draw 4% of the portfolio in the first year, then raise the amount with inflation each year. It is a starting point for planning, not a property of markets. How long 4% lasts depends entirely on the return and inflation that follow, which nobody knows in advance.

With the default return and inflation, here is how long $1,000,000 lasts at different first-year rates:

One percentage point either side of 4% moves the answer by roughly nine to nineteen years, which is why the chart under the calculator compares five rates on your own inputs.

How return and inflation change the answer

What matters is the gap between the return and inflation, because inflation sets how fast the withdrawals grow. Holding the 4% withdrawal and the other defaults fixed:

• Inflation at 0%: the 5% return more than covers a level $40,000, and the money is still growing after 100 years.
• Inflation at 2%: 43.2 years. At 3%: 33.6 years. At 4%: 28.4 years.
• Return equal to inflation, 3% and 3%: exactly 25 years, the same as dividing 100% by 4% with no growth at all.
• Return at 7% with 3% inflation: 71.6 years.

These are averages applied evenly. A real portfolio that suffers a fall early in retirement, while withdrawals are being taken, can run out sooner than its average return suggests, because the money sold in the bad years is not there to recover. The calculator does not model that order of returns; test it by lowering the return to a cautious figure.

Withdrawing at the start or the end of the year

Taking each year's money at the start means that money never earns the year's growth. Taking it at the end lets the full balance grow first. The default is the start, the more cautious of the two.

On the default inputs, switching to the end of each year stretches the portfolio from 33.6 to 36.0 years, and raises the withdrawal that lasts exactly 30 years from $43,449 to $45,622.

Worked examples in pounds and dirhams

The currency selector changes formatting only; nothing is converted.

Pounds. A £500,000 portfolio paying £25,000 in the first year, 5%, with an assumed 6% return and 2.5% inflation, lasts 32.2 years. Over a 25-year horizon it still holds £300,077 at the end, and the withdrawal that would use it up in exactly 25 years starts at £29,064, or 5.81%.

Dirhams. AED 3,000,000 paying 5%, AED 150,000, in the first year, with an assumed 5.5% return and 2% inflation, lasts 32.3 years. The first-year withdrawal that lasts exactly 30 years on those assumptions is AED 156,350, or 5.21%.

Taxes on withdrawals and on growth vary by country and account type, and are left out of both examples.

How to work out a withdrawal rate in Excel

Two Excel functions reproduce this page when withdrawals rise with inflation, as long as you work in the real rate. Put =1.05/1.03-1 in a cell for the real rate, here called A1.

• Withdrawal that lasts 30 years: =PMT(A1, 30, -1000000, 0, 1) returns 43,449.40. The final 1 tells PMT that payments come at the start of each period.
• Years a $40,000 withdrawal lasts: =NPER(A1, 40000, -1000000, 0, 1) returns 33.62. This page shows 33.6; the two can differ very slightly because they split the final, partial year differently.

Both answers are in first-year money: the PMT result is the year 1 withdrawal, and the later ones rise with inflation from there.

What this calculator leaves out, and mistakes to avoid

It uses one return and one inflation rate for every year, so it cannot show the effect of a crash in the first years of withdrawals, a spell of high inflation, or a change in spending. It ignores tax, fund and advice charges, pensions or other income that start later, and the fact that people tend to spend differently at 65 and at 85. Treat the result as a scenario, and try a lower return or a higher inflation figure to see how sensitive it is.

• Forgetting inflation. A level $40,000 lasts far longer than one that rises each year, but buys less and less.
• Using a real return and inflation together. This page takes a nominal return and inflation separately; entering a return that is already after inflation counts inflation twice.
• Ignoring charges. Yearly costs come straight off the return, so subtract them before you enter it.
• Reading the horizon as a lifespan. Set it to the longest period the money might need to cover, not the average.

Glossary

Withdrawal rate: the first year's withdrawal as a percentage of the starting portfolio. Inflation-linked withdrawal: a withdrawal raised each year by inflation to keep its buying power. Nominal return: growth before inflation is taken off. Real return: growth after inflation. Horizon: the number of years the money needs to last. Sequence of returns: the order in which good and bad years arrive, which matters once withdrawals begin.

Frequently asked questions

Courses behind a drawdown portfolio

Sources and review