Guyton-Klinger’s Sustainable Withdrawal Rules for Retirement Portfolios

Let’s face it, retiring clients want to have their cake and eat it. They want the security of an annuity and the flexibility of drawdown pot. Accordingly, one of the most important financial planning challenges of the 21st century is to help clients make sure their pension pot lasts a finite but unknown period in retirement. Simultaneously, we want to prevent inflation, the thief that keeps on taking, from depleting the buying power of their income over what may be a 25, or possibly 30-year retirement.

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Bengen’s ‘Safe Withdrawal Rate’

Nearly 20 years ago, in an attempt to help address this challenge, the popular ‘4% rule’, otherwise known as ‘safe withdrawal rate’ (SWR), was developed by US-based financial planner (now retired) Bill Bengen. Bengen simulated withdrawals from simple stock and bond portfolios over several 30-year periods, starting from 1926. Using this technique, he came to the conclusion that 4% is the highest percentage of the initial portfolio, indexed with inflation, which can be withdrawn without running out of money over a 30-year period.

More than 100 years of market data for a 60/40 portfolio puts the SWR for the UK at 3.7%.

In practical financial planning terms, the SWR is the inflation-adjusted percentage of the initial portfolio. It is designed like that to make sure the client will be able to maintain the buying power of their income during their retirement. But the SWR is designed based on the worse economic scenario in history. In fact, what is also important from a financial planning point of view is that in more than 80% of historical scenarios, after a 30-year period, the classical SWR would have resulted in a retiree actually having more money than they started with.

Using this model, it is likely that once the client is a few years into their retirement, it will become apparent that the higher withdrawal rate would be sustainable. For instance, take the case of a client who retires at 65 with a £300,000 pot and who is taking an inflation-adjusted withdrawal of £12,000 per annum. If that client finds themselves with a portfolio of £350,000 at the age of 75, most planners would consider it pretty sustainable to increase withdrawal to, say, £17,500 per annum.

The challenge, then, is to come up with a framework that enables clients to take a higher withdrawal rate, while having safeguards to prevent withdrawals from becoming unsustainable. The broad implication of all this is that the vast majority of people should be able to withdraw a higher proportion of their portfolios than they would using a broad-brush classical SWR calculation. The trouble is, on an individual basis, we do not know in advance whether clients are heading for a series of economic scenarios that would sustain a withdrawal rate higher than the generic SWR.

Without the proverbial crystal ball, how do we improve the income in retirement (over and above the ‘4% rule’), without risking clients running out of money or having to reduce their withdrawals significantly in the future?

[bctt tweet=”The financial planning challenge of the 21st century is how to ensure a pension pot lasts a lifetime. “]

Guyton-Klinger decision rules

One method we can use to address this question is the Guyton-Klinger decision rules, designed to optimise withdrawal. They were created by a practising financial planner, Jonathan Guyton, principal of US firm Cornerstone Wealth Advisors, with the help of computer scientist William Klinger. These rules were originally published in the Journal of Financial Planning in 2006 and were replicated by Dr Wade Pfau, CFA in 2013.

The first two of its four rules are designed to make sure a sustainable withdrawal rate of about 5.5% is achievable over a retirement period of 40 years:

  • The withdrawal rule: Increase withdrawal in line with inflation in the previous years, unless the previous year’s portfolio total return was negative. This is by far the most effective of the rules. By making sure that withdrawals are frozen in the years following a negative portfolio return, the danger of pound-cost ravaging is drastically minimised. Following the rule means clients do not ‘make up’ for missed withdrawal increases.
  • The portfolio management rule: Extract the gains from an asset class that has performed best in the previous year to provide the income, and move excess portfolio gains (beyond what is needed for the withdrawal) into a cash account to fund future withdrawals.
  • The capital preservation rule: If the current withdrawal rate rises above 20% of the initial rate, then current spending is reduced by 10%.
  • The prosperity rule: Spending in the current year is raised by 10% if the current withdrawal rate has fallen by more than 20% below the initial withdrawal rate. Doing this means the client does not miss out on higher sustainable spending when markets are doing well.

The last two rules are designed as safeguards to stop the income the client slices away from their retirement pot becoming so high that the client risks running out of money, or so low that that their lifestyle is drastically reduced. These two rules are no longer applied within the final 15 years of the planned investment period.

By applying these rules, the client is able to increase the withdrawal rate to 5.5% of their initial portfolio (based on 65% equity allocation), without running out of money over a 40-year retirement period. Clients would have to freeze spending a few times over that period, but their overall spending power is not impaired because this is offset by the times in which they were able to increase withdrawal. By having a sound framework in place to manage withdrawals in a dynamic way, the risk of running out of money is significantly lowered.

The Caveat

The caveat is that, Guyton’s research, like many other similar SWR research is based on so called ‘naked portfolio’ and so has to be adjusted for fees. In addition, the research is based US market data, using Monte Carlo simulations and we know from previous research that the US market sustains a slightly higher withdrawal rate (about 0.30%) than the UK.
On a positive note, Michael Kitces and I are currently working to adapt these dynamic withdrawal rules to UK market, using historical market data (rather than Monte Carlo simulations). The results will be published in a sequel to the Pound Cost Ravaging paper early next year, so keep an eye out for that. Better still, join us at the Science of Retirement Conference, where Dr Wade Pfau will cover this and other sustainable withdrawal strategies. 
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Abraham Okusanya
Abraham is the founder of FinalytiQ, a research consultancy for platforms, asset managers, and advisory firms. Recognised as one of the country’s leading experts in retirement income, platforms and investment propositions, Abraham has authored several papers on these subjects and delivered talks to the Personal Finance Society, The FCA and several conferences across the country.
He holds a Master’s degree from Coventry University and an alphabet soup of qualifications, including the Investment Management Certificate, Chartered Financial Planner, CFP and Chartered Wealth Manager designations. He was one of 5 finalists for the Professional Advisers Personality of Year Award 2015 but the award went to a more deserving winner, obviously!

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    Hi Abraham.
    I’m hoping that this is the sort of thing we’ll be discussing at the Science of Retirement Conference.
    I’d be interested to see how the UK safe withdrawal rate is arrived at – in particular, how much of the withdrawal rate is income, and how much is capital. This has an impact on the amount of tax the investor has to pay, and the net returns they can expect. Also on the choice of investment vehicle.
    I’m also interested to hear what effect charges have. It sounds like we should be deducting charges from the portfolio – fund management charges (about 0.7% for an active portfolio), platform charges (about 0.3%), adviser fees (much variation!). With a typical adviser charge of 1%, the UK SWR of 3.7% reduces to a less attractive 1.7%. I think a lot of investors will wonder whether there is any point in investing when this is the rate of return they can achieve (particularly as inflation is so low nowadays, and keeping up with inflation is the only point of taking risk if you can only get 1.7% from a portfolio – you can get the same from cash deposit if you make a bit of an effort).
    What goes with this, of course, is whether you should simply reduce the effect of charges, and therefore increase the SWR, by opting for cheaper funds. This suggests index tracking, but that also increases risk (either due to lack of diversification – you cant index track several asset classes – or by taking on counterparty risk – you can use derivatives to track some asset classes, but this creates an additional risk).
    I’d be interested in your thoughts.
    It’s great to read some dispassionate research, thank you for this.
    Philip Wise


      Yes, Phil, we’ll be discussing all these at the conference and I look forward to seeing you there!

      With regards to fees, the impact of fees on SWR is not directly proportional. Because the SWR is the very worse case scenario, every 1% of fees tend to reduce SWR by 0.40%! This may sounds illogical but there’s a clear and well documented explanation for this. Perhaps I will cover this in more detail in a future post but in the meantime see for more on this

      With regards to client expectation and comparison with cash, again remember than SWR is the historical worse case scenario, and accordingly clients can and should expect to be able to higher withdrawal than SWR under most market conditions but we need to have a sound framework in place, if market conditions turn against them, hence why strategies like Guyton/Klinger rules work well.

      Thanks Phil and look forward to seeing you at the conference!



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