For most of a working life, retirement planning is about accumulation: putting money aside and letting it grow. The moment you stop working, the problem flips. Now the question is how to turn a lump sum into a reliable income that lasts as long as you do.
How long does it need to last?
This is the hardest question and the most important one. People routinely underestimate how long retirement can be. A couple retiring in their mid-sixties should plan for at least one of them living well into their nineties. Planning for an average lifespan means there is roughly a coin-flip chance of outliving your money.
How much can you draw?
A widely quoted rule of thumb suggests withdrawing around 4% of your starting pot in the first year, then adjusting that amount for inflation. It's a useful starting point for a conversation, not a guarantee. The right rate depends on how your money is invested, how long you need it to last, and how markets behave — particularly in the first few years.
Sequence risk: why the early years matter most
Two retirees can earn the same average return over twenty years and end up in very different places. If markets fall sharply just as withdrawals begin, you're selling investments at low prices to fund your income, leaving less to recover when markets bounce back. This is called sequence-of-returns risk.
Common ways to manage it include keeping one to three years of spending in cash or short-term bonds, being willing to trim withdrawals after a bad year, and avoiding an overly aggressive portfolio right at the point of retirement.
Questions worth asking yourself
- What do I actually spend in a year, and what will change when I stop working?
- Which income is guaranteed (pensions, annuities), and which depends on markets?
- How would I adjust if my portfolio fell 20% in my first year of retirement?
- Do I want to leave something behind, or is spending it all acceptable?
