What’s the safe withdrawal rate danger zone?

This is part two of a series about the safe withdrawal rate (SWR) for a portfolio in drawdown, and how to improve it.

Unfortunately I set the cause back a bit in the first part, when I showed that the UK safe withdrawal rate is quite dismal – just 3.1% for 30-year spans, versus the commonly cited and far cheerier 4% rule that’s derived from US data.

On the other hand, it’s possible to argue that all safe withdrawal rate strategies are excessively doom laden.

SWRs are founded on the historical worst-case. Normally things turn out brighter than that. Moreover 155 years of data for the 60/40 portfolio shows that the UK SWR was 4% or more some 88% of the time.

So mostly you didn’t fail if you followed the man with the moustache.

Anachronistic heuristics

The problem is your SWR is only knowable in retrospect.

Well, your heirs can know it. You’ll be past caring.

But for my part I’d like to find out if there’s a way to track retirement portfolio wellbeing in real-time.

Can we get advance notice if it’s on the path to the sunlit SWR uplands? Or if it’s plunging into the valley of death, despair, and cat food?

Just how soon can we tell whether withdrawing 4% – or whatever number – is draining our portfolio like it’s Dracula’s supper, versus doing no more damage than a flea who fancies a light snack?

Spot the dog

The way I’m going to tackle this initially is by asking what bad looks like.

Do the historical worst-cases have specific features in common? If so, this could point the way to spending more freely when your retirement dashboard isn’t ablaze with warning lights.

By the same token, if we can pinpoint the difference between a downward spiral versus everyday turbulence that doesn’t stall the engine, then we won’t have to spend all our time clutching worry-beads and praying to the investing gods.

It’d also be nice to avoid the trappings of dynamic withdrawal rates and other complications designed to preserve portfolios, if only because many people seem reluctant to use them.

Perhaps we can instead find simpler rules-of-thumb that operate on more of a pay-as-you-go basis.

Investing returns sidebar – All returns are real annualised total returns. In other words, they show the average annual return (accounting for gains and losses), are inflation-adjusted, and include the impact of dividends and interest.

The SWR haves and have nots

The chart below divides the UK’s notional SWR retirees into two camps: those that benefitted from a 4% withdrawal rate and higher, and those that, as I believe Keynes put it, “Had a ‘mare.”

Author’s own calculations. Data from JST Macrohistory1, FTSE Russell, A Millennium of Macroeconomic Data for the UK and ONS. March 2025

Team Unlucky’s SWRs fell below the 4% line. These include every retirement cohort from 1896 to 1916, bedevilled as they were by World War One and its economic aftershocks.

Then there’s the 1934 to 1940 crowd. I’m not sure what they had to complain about? World War Two wasn’t ideal, I s’pose.

But there’s more to it than that, as shown by the 1946 to ‘47 group who were sucked under too. Indeed, the UK’s most flaccid SWRs can’t simply be written off with pat reference to a couple of world wars.

1917 retirees, for example, enjoyed a bouncy 4.8% SWR – despite their golden years stretching through two global conflagrations, a pandemic, and a Great Depression.

Most surprisingly, the class of 1932 lived high on the 6.2% hog, despite the onrush of the Second World War.

Near misses

Two later cohorts skated close to disaster but didn’t quite fall through the ice.

The 1969-ers were on track for the worst result ever until they were bailed out by the wonder years of the 1980s. (1969 was also the low point for US portfolios priced in GBP, as we saw in the last article.)

1960 retirees also nearly came a cropper. They ran a similar gauntlet of stagflation, plus huge crashes in the UK stock and bond markets.

Aside from that, most of the other cohorts sit comfortably above 4% – albeit the Y2K-ers are having a nail-biter thanks to retiring on the eve of the Dotcom Crash, swiftly followed by the Global Financial Crisis, post-Covid inflation, and Lord knows what’s to come with Agent Orange at the controls.

So with that lot swept into the bucket of the SWR damned, what can they tell us about the different roads to perdition?

A bad start

Famously, sequence of returns risk is a major hazard for retirees. That is, a string of bad returns early in retirement is far more consequential than if you took the same hit in later years, with your clogs fit to pop.

Researcher Michael Kitces established that the first decade of equity real returns had the biggest impact on US safe withdrawal rates for 30-year retirements.

Kitces found that a couple of down years at the beginning of retirement actually had a fairly low correlation with SWRs – down in the vicinity of 0.28.

The average 10-year real return for equities was much more predictive: producing a 0.8 correlation with the 60/40 portfolio’s safe withdrawal rate.

The correlation then dropped to 0.45 for 30-year annualised real returns. That’s because the final years of retirement exert less influence on the overall outcome.

The upshot is you don’t have to sweat a few years of bad returns when you’re fresh out of the gate – especially if markets bounce back quite quickly, as they did after the GFC.

Across-the-pond life

However, what’s true for the US often doesn’t hold for the UK. So I performed the same test on Blighty’s data set and discovered that our danger zone is the first 15 years.

The table below shows us the correlation between real annualised returns over various time periods and 30-year UK safe withdrawal rates for 60/40 portfolios:

	Equities	–Bonds–	60/40 portfolio
1 year	0.38	0.4	0.43
5 years	0.65	0.62	0.7
10 years	0.79	0.78	0.85
15 years	0.84	0.85	0.92
20 years	0.78	0.82	0.88
30 years	0.63	0.7	0.73

The UK’s track record tallies with Kitces finding that the first few years don’t tell us much about the path we’re on.

However we’ll probably have a very good idea after 15 years. A 0.92 correlation indicates that our portfolio returns during the first half of a 30-year retirement are likely to have a decisive impact upon the overall amount of spending the portfolio can support.

The first decade is highly informative, too.

And while the correlation of SWRs with the UK’s 30-year annualised return is much less by comparison, it remains high enough that the hindmost years clearly count for something.

Later on we’ll see that extreme events in the latter half of certain retirements can still deflect their course, for better or worse.

To sum up the above: A couple of bad years at the beginning of a retirement aren’t worth fretting about (unless they’re apocalyptic). However, ten to 15 years of poor returns are likely to lock you into the low SWR dungeon. If that happens then your portfolio probably won’t last unless you rein in spending.

What do we mean by poor 15-year returns?

Exactly what kind of lacklustre 15-year return is associated with which bleak SWR?

This scatter plot graph enables us to pick out the patterns:

The WOAT2 SWRs (red lozenge, ranging from 2.85 to 3%) are associated with 15-year annualised returns of 0% to -6%. So if you average more than 0% per year (inflation-adjusted) in the first half of your retirement, then you’re probably not going to scrape the depths in the endgame.

Next, let’s look at the same chart again, but refocus our red lozenge to take in almost the entire negative return cluster:

This view suggests that if your initial 15-year returns are negative then you can pretty much rule out a 4% SWR. Indeed, you could be heading into horrible history territory.

There is one exception. The green arrow points to the 4.15% SWR achieved by the class of 1960. They got that despite chalking up grim -3.2% 15-year real returns.

Stick around and I’ll show you under the bonnet of that journey in the next post in the series. (Consider that a warning!)

Suffice to say, I wouldn’t bank on that miracle happening again if I was clocking -3% 15-year returns.

Alright, let’s take a final goosey at the scatter plot. This time the red lozenge of fate falls upon what you could have won with weak positive returns.

Scraping a 1-2% real return puts you in a wide band where the SWR outcome is likely to lie somewhere between 3% and north of 5%.

Lastly, bagging the 4% long-term average return for a 60/40 portfolio (green lozenge of destiny) is associated with a 4.5 to 5.5% SWR.

Incidentally, the 15-year annualised return for Year 2000 60/40 retirees was 3.2%. The trendline suggests that – if they’d been doing this analysis in 2015 – they could have hoped for a 5% SWR while fearing the worst downside result of just over 4%. By my reckoning, this cohort is on course for a 4.5% SWR, assuming they average a 0% return over their remaining five years to 2030.

The story so far…

Our scatter plot provides some guidance as to the historical dispersion of outcomes.

Although it must come with the usual tug of the forelock to uncertainty.

History does not span all there is to know. For example, all bets are off if World War Three rips humanity a new one tomorrow.

SWR Cluedo

Let’s now chug on our thinking pipe and line up our main suspects in the mysterious case of the battered SWR.

Whodunnit? Was it inflation? In the grocery store? With the shocking price of bacon?

Here’s the movements of 15-year average inflation and SWRs during the periods in question:

We have our culprit, officer!

Clearly the worst SWRs go hand-in-hand with high average inflation (orange line). While falling inflation corresponds to the SWR heights.

Not so fast! It’s curious that peak inflation is not associated with the most calamitous SWRs. And some cohorts scored amazing SWRs while inflation was doing its worst. For example, 1977 delivered a 9.8% SWR despite tussling with 7.5% average inflation for the first 15-years of its cycle.

High inflation is a trouble-maker then, but it doesn’t act alone.

Let’s layer on 15-year annualised real returns in blue:

This chart gives us a better picture. Especially when you train your eyes on the blue plunges below the grey 0% returns line.

The slump associated with World War One3 is by far the deepest.

World War Two is relatively mild by comparison. Hence only seven cohorts slipped below the 4% SWR line (1934-1940) whereas fully 21 did under the malign influence of the First World War (cohorts 1896-1916).

Still, we can also see that the 1946 to 1947 brigade fell below par despite positive returns. Whereas 1960 kept its nose above water while coping with a sharp below-zero dive.

A tale of two retirements 

Those latter results help show that the second half of the portfolio’s lifespan does matter.

Both the late Forties crew and the Sixties swingers were in trouble by the end of the first 15 years – with the 1960-types looking slightly more precarious. But then the 1960 cohort enjoyed a double-digit romp to the finish line. Essentially, they were bailed out by 13% miracle-gro returns for the last 15 years. (Still, even then they only managed a 4.2% SWR.)

In contrast the fate of the Forties mob was sealed by mediocre returns in the 1960s (2.6% annualised). The crash of 1973-74 finished them off but they were already on life support.

What do I take from that? That the 1960 journey is the exception that proves the rule. They needed a Hail Mary to sustain a passable SWR and they got it.

But if your portfolio was looking similarly anaemic after 15 years, it’d be more rational to assume the 1946-47 outcome and cut back your spending accordingly. (Or to think about annuitising the bulk of your portfolio, or to take out a reverse mortgage, depending on your options.)

Looking for a sign

Behind-the-scenes of this post, I’ve spent some time delving into the individual paths taken by the UK’s many retirement runs.

I’ve found it tremendously helpful to look beyond the standard worst-case SWR scenario in search of common signs of distress that anyone could monitor to avoid spending down their portfolio too quickly.

And I think I’ve found some useful pointers! I’ll share those in the next post.

Take it steady,

The Accumulator

Bonus material: Why use the UK’s safe withdrawal rate history?

It’s important to recognise that neither the UK, nor the US, nor the World is locked onto any particular safe withdrawal rate path.

As I alluded to earlier, if we nuke ourselves to Kingdom Come then the global SWR goes to zero.

That’s that. Do not pass the Great Filter. Do not collect $40,000.

But let’s be positive. Let’s assume we don’t face a future being bent into paper clips by our AI overlords. Then we’re left with a range of possibilities which the past can help us scope.

The problem with the US safe withdrawal rate is that it looks fortuitous. It’s based on a timeline in which America won the 20th Century.

The World portfolio fails to match the US SWR, as does every other country except Denmark. (See Wade Pfau’s paper: Does International Diversification Improve Safe Withdrawal Rates?)

Huh? Tiny Denmark? Conquered by Nazi Germany Denmark? Yep, and South Africa was Top Five, beating out many more powerful and economically successful countries.

Explain that. 

More significantly, Pfau found that no country – not even the US – could replicate William Bengen’s original 4% SWR finding.

Why? Because Bengen, the author of the 4% rule, relied upon a dataset containing better US historical returns than the one used by Pfau. Both archives are well credentialed. Both offer a version of the past. But the differences between the numbers reveal there’s nothing inevitable about the 4% rule – even if you invest solely in the US.

Should US assets exhibit a moderately worse sequence of returns in the years ahead than they did in the past, then future American investors may have to anchor on a 3% rule – or something nastier still.

That’s a plausible outcome. Hence retirement researchers have turned to international datasets and Monte Carlo studies to challenge the assumptions embedded in the US’s exceptional past returns. (I’ve previously used one such database to determine a World SWR of 3.5%.)

What’s interesting about the UK’s SWR history4 is that it enables us to envisage a future which is a little worse than the American past. One of geopolitical decline. One where they confront military catastrophe but avoid utter disaster. One in which inflation is stickier than the US has previously experienced.

It’s not hard to imagine.

The UK safe withdrawal rate is an antidote to excessive optimism. It helps us avoid clinging to the singular path taken by the US, as if inferior outcomes are not possible.

Aiming for a 3% SWR, say, gives you greater downside protection – or it can be the prompt for serious research into how to improve your withdrawal rate from that baseline. 

1. Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. The Rate of Return on Everything, 1870–2015. Quarterly Journal of Economics, 134(3), 1225-1298. [↩]
2. Worst Of All-Time! [↩]
3. The blue line shows you the average returns for the 15-years beyond each data point on the chart. [↩]
4. The UK was ranked 8th out of 20 countries in Pfau’s paper. [↩]