When it comes to planning for retirement, one of the most important questions you will face is:
How much can I safely withdraw from my pensions and investments each year without risking running out of money?
Answering this question is at the heart of the concept known as the “safe withdrawal rate.”
Understanding the Safe Withdrawal Rate
The safe withdrawal rate (SWR) is a guideline used by retirees to determine how much they can withdraw from their retirement savings each year while minimising the risk of running out of money before they die.
It is essentially about balancing your need for income with the longevity of your investments.
Many experts believe that 4% per year is the optimum SWR.
Why 4%?
The 4% rule comes from a study conducted in the United States in the 1990s, often referred to as the “Trinity Study”.
The study concluded that, by withdrawing 4% of your portfolio annually, your investments should grow enough over time to replace what you’ve withdrawn, taking into account both inflation and market volatility.
However, it’s important to note that this rule is based on past market performance, specifically in the U.S.
The stock and bond markets there have had strong historical returns, but this doesn’t guarantee that future returns will be the same, nor does it account for different economic conditions in other countries, such as the UK.
Is 4% Safe for Everyone?
While the 4% rule is a helpful starting point, it isn’t a one-size-fits-all solution.
Several factors can influence what might be a “safe” withdrawal rate for you, including:
✔️ Sequence of Return Risk: If markets perform poorly early in your retirement, even a 4% withdrawal could be too high.
✔️ Longevity: If you live longer than 30 years in retirement, you may need to lower your withdrawal rate to ensure your savings last.
✔️ Inflation: Higher-than-expected inflation can erode the purchasing power of your withdrawals.
✔️ Personal Spending Needs: Your own lifestyle, healthcare needs, and unexpected expenses will also play a big role in determining how much you can safely withdraw. For example, in the early years of retirement, you may need to draw down more than 4% as your lifestyle is more active. Then in the later years, as you become less active, you will draw down less.
Adjusting the Safe Withdrawal Rate for Expats
As an expat, you face additional challenges when it comes to retirement planning.
Different tax laws, currencies, and living costs in your country of residence all need to be factored into your withdrawal strategy.
Here are a few tips to help you adjust the safe withdrawal rate to your situation:
- Consider Your Currency Exposure: If your investments are in one currency but your expenses are in another, you will need to consider how exchange rates could impact your withdrawals.
- Factor in Tax Efficiency: Different countries have different tax rules. Be sure to understand how your withdrawals will be taxed in both your country of residence and your home country.
- Reevaluate Regularly: Your circumstances and the financial markets will change over time. Regularly reassessing your withdrawal strategy can help ensure that your savings last.
- Plan To Live Longer: As life expectancy increases, planning for a retirement that lasts 30 years or more is wise. You may want to start with a lower withdrawal rate, such as 3.5%, to give your portfolio more room to grow.
- Diversify Your Investments: A well-diversified portfolio can help manage risk and potentially improve returns, giving you more flexibility in your withdrawal strategy.
The Bottom Line
The safe withdrawal rate is a useful tool, but we do not exist in a vacuum.
Your retirement plan should be tailored to your personal circumstances, taking into account your goals, health, market conditions, and the unique challenges you face as an expat.
Working with a financial adviser who understands the specific needs of expats can help you develop a withdrawal strategy that balances your need for income with the longevity of your investments.
Remember, a successful retirement isn’t just about how much you save, but also about how wisely you spend what you’ve saved.
If you have any questions or want to discuss your retirement plan in more detail, feel free to get in touch.
