This article first appeared in Personal Wealth, The Edge Malaysia Weekly on December 2, 2019 - December 8, 2019

On average, investors believe they can realistically withdraw 10.3% of their retirement savings each year and still not run out of money, according to a recent study by Schroders. This is significantly higher than 4%, which is considered to be the rule of thumb.

According to the Schroders Global Investor Study 2019, a quarter of the respondents believed they could withdraw at least 15% a year while the vast majority (87%) thought they could take out a minimum of 5% each year and not run out of retirement savings. However, those who have retired have a more realistic expectation of how much they are able to draw down (an average of 8.4%) compared with those who have not retired (an average of about 10.6%).

“Looking at the geographical differences, people in Europe appear to be slightly more realistic, believing they can take out 9.8% on average. On a regional level, Japan had the lowest average at 7.3% while India was at the other end of the scale, with people thinking they could take 15% without running out of money,” says the report.

In a Nov 19 article on the study, Schroders head of retirement savings Sangita Chawla was quoted as saying that such a high average figure for withdrawals in this market environment is alarming. “Our calculations show that a 10.3% withdrawal rate could deplete a retiree’s savings in a decade. It could be because too many people are underestimating how long they may live, considering that the global average life expectancy for 65-year-olds has risen to 82 from 80 in the past decade. It is also possible that people are more bullish about the amounts they plan to withdraw because they have other sources of income or wealth to rely on.”

In the same article, Schroders investment writer David Brett says the 4% rule has been the basis for retirement planning in recent decades. He points out that some experts even deem such a withdrawal rate as too high.

“From retirement savings of US$100,000, an investor could draw US$4,000 a year, with the withdrawal rate rising with inflation each year. Taking more than this runs the risk of the money running dry within 30 years,” says Brett.

“For the average retiree living 20 years and wishing to withdraw 10% per year, the same US$100,000 would need to be invested in assets that return 10% per year after fees and inflation. It is not only highly unlikely that the retiree would want to take this level of risk, but it is also difficult to find portfolios that can deliver this level over a 20-year period.”

Millennials leading the charge

The study shows that among the different age groups, millennials appear to be the most bullish when it comes to retirement savings, with 38% very confident that they will have enough for retirement.

“This is understandable when we consider that this generation is also saving the highest proportion of their annual income, at 15.9% on average. This decreases with age, and the silent generation, those working over 71, are only saving an average of 13.1% of their annual income,” says the report.

According to the study, people’s confidence in their level of savings varies drastically around the world. In fact, several countries are facing a number of similar issues that are likely to influence confidence levels. Japan, which struggles with an ageing population, has 53% of non-retired people and 44% of retired people uncomfortable with their level of savings for retirement.

“Population ageing started in high-income areas such as Japan. However, now low and middle-income regions are also facing this shift. The World Health Organization has speculated that Chile, China and Russia will have a similar proportion of older people to Japan by the middle of the century,” says the report.

Pension policy plays a role as well. In Australia, only 17% of retired and non-retired people are uncomfortable with their level of savings, due to their longstanding compulsory pension system. Australian citizens contribute 9.5% of their annual income to retirement savings and the percentage is expected to grow as well.

In contrast, 40% of non-retired and 31% of retired people in Hong Kong are uncomfortable with their contribution to retirement savings, due to their younger retirement system known as the Mandatory Provident Fund. Both employers and employees have to contribute 5% of the monthly salary. The study also mentions that salary inflation in Hong Kong has not matched the recent rise in living expenses, reducing available disposable income to add to people’s retirement savings.

According to the report, expectations of investment returns also drive confidence levels when it comes to retirement savings. India and China have fewer people with low levels of confidence, both among the retired (India 7%, China 7%) and non-retired (India 6%, China 17%), because their economies are expected to grow rapidly over the coming decades and providing them with the opportunity to build their personal wealth.

“Conversely, regions that have shown sluggish growth or deflation are likely to have dented people’s saving expectations. This is expected to have an impact on their citizens’ lack of confidence in retirement savings for non-retired and retired alike, as potentially seen in Japan (53% and 44%), South Korea (44% and 53%) and Russia (41% and 58%),” says the report.

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