Only a small percentage of people can comfortably live off their retirement capital for the rest of the lives. Making well-informed asset and income allocation decisions early on can improve our chances of retiring comfortably. Nobody wants to be forced into life changing decisions late in their lives such as where to invest or which investment company to choose and how much should I invest? Therefore, it is always a good idea to make the right choices early in the process.

Asset allocation and withdrawal rates

There is no recommended withdrawal rate since everyone’s circumstances are different. While there is “no one-size fits all“ solution, various studies have yielded a theory and method that will allow one to comfortably live off an inflation-adjusted income for 30 years after retirement. The method, proposed by US financial advisor WP Bengen in 1994, has withstood a number of market booms and fails and provides an excellent starting point for your own plan.

The theory suggests that you:

  • Start by withdrawing only 4% of your savings at the end of your first retirement year.
  • Increase/decrease your withdrawal’s absolute cash value by inflation every year
  • Maintain a minimum of 50% asset allocation in equities.

This method has since become the rule of thumb for many advisors, when planning a client’s retirement income. It is important to note that the 4% withdrawal only holds if the sum is adjusted by inflation and rebalanced each year.

How your asset allocation impacts your retirement

It is essential that you maintain an appropriate asset allocation during the entire retirement period. Now the theory is based on the assumption that you build and rebalance your own portfolios, but there is another way you can achieve the appropriate asset allocation: Use a balanced fund. A balanced fund has a fund manager who varies the asset allocation and invests in shares, money market, bonds and offshore assets according to where they find value. Now the equity exposure in some balanced funds are limited to a maximum, and Bengen advises a 50% equity exposure, therefore it’s a good idea to find out the average equity exposure for the fund you’re invested in.

Putting it into practice

There are a number of factors, which influence your retirement withdrawal rate and the longevity of your capital:

Initial Capital

Consistently saving over a long time period, without making early withdrawals and enhanced by sensible asset allocation is the best chance you have of starting retirement with decent capital. Once you have retired there is little you can do, but there are still smart ways to make it work for you.

The inflation factor

Inflation erodes you money’s buying power. Inflation can quickly erode your money’s value if you do not adjust for it. You need to factor in the published national inflation rate as well as your personal inflation rate (like medical or educational costs) in order to preserve the value of your capital.

Withdrawal rates

This affects how long your capital lasts. The more you withdraw, the faster you savings deplete. You should calculate a reasonable increase each year, which factors in inflation and amend your withdrawal rate accordingly. Some people reduce their percentage each year, which helps to extend the lifetime of their savings.


Returns may vary depending on your risk appetite and your investment’s equity exposure level. High equity weightings tend to provide higher returns over the long-term, but at the cost of increased volatility. This translates into higher risk and of course the opposite is true. Therefore you should choose your equity weighting by considering you goals and risk appetite.

Your money will have a great chance of outliving you if you start by drawing only 4% and adjusting by inflation annually.

Retirement is not the end; rather it is the beginning of a new stage in your investment life cycle. It is important that you plan carefully and understand what impact all of your decisions have on your future, in order to increase your chances of retiring comfortably. In fact, with careful planning, you can grow your capital and withdraw a comfortable, sustainable income. If you ever find yourself overwhelmed by all of these moving parts then consider consulting a good, independent financial advisor who will help you formulate a plan to fit your needs.


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