Frequently asked questions
What interest rate should I use for retirement drawdown?
Use the expected return on your retirement portfolio during withdrawals, which is typically lower than the accumulation phase because you shift toward safer assets. A balanced portfolio of bonds and some equities might return 4-5%. For a conservative estimate, use 3-4%.
Does this account for inflation?
No, the payments are fixed in nominal terms. In real purchasing power, each payment buys slightly less over time due to inflation. For inflation-adjusted planning, subtract your expected inflation rate from the interest rate (e.g., use 2% instead of 5% if you expect 3% inflation).
What happens to the money at the end of the payout period?
The balance reaches exactly zero at the end. Every payment draws a mix of interest earned and principal. Early payments are mostly interest; later payments consume more principal. If you need money to remain after the payout period, shorten the period or reduce the payment amount.
How does this relate to the 4% rule?
The 4% rule suggests withdrawing 4% of your portfolio in year one and adjusting for inflation thereafter. This calculator uses a fixed-payment annuity formula instead, which fully depletes the balance. The 4% rule aims to preserve principal indefinitely; this calculator shows the maximum sustainable income for a fixed period.
Can I use this for a pension buyout decision?
Yes. If offered a lump sum in lieu of monthly pension payments, enter the lump sum and see what monthly income it could generate. Compare that to the pension's monthly payment. If the pension pays more, keeping it is usually better (unless you have strong reasons to take the lump sum).