How to model retirement without running out of money

Nobel laureate William Sharpe once called the drawdown challenge "the nastiest, hardest problem in finance."

He was not being dramatic.

The idea of running out of money when you're 85 and still very much alive is terrifying. The fix is a plan with simple inputs, conservative assumptions, and rules that tell you when to course-correct.

Of course, we can't stress enough that this is general information and that we are not financial advisers. We absolutely encourage you to get regulated financial advice that takes your circumstances into account.

Set conservative retirement goals

Before you start fiddling with spreadsheets, you want to get your core assumptions straight. The main moving parts that could blow your plan off course are as follows:

Longevity risk

A 65-year-old man in the UK can expect to live to about 83, a woman to around 86. But don't let averages mislead you. There's a non-trivial chance of much longer life: many who are currently 65 will make it into their 90s, and the number is rising year-on-year:

Source: ONS, Estimates of the very old, including centenarians, UK: 2022 to 2023, figure 1

If you plan only using averages you risk outliving your pot. Model for at least age 95, maybe even 100 if you want extra margin.

Lifestyle and spending

The Pensions and Lifetime Savings Association estimate that a "comfortable" retirement for one person costs £43,900 a year after tax (these are spending targets, not income).

That buys you a couple of European holidays, a medium car swapped every five years, and a fridge with plenty of food in it. "Moderate" is about £31,700. The state pension alone doesn't get you close, so your savings will need to do the heavy lifting.

Inflation

After decades of gentle price rises, the double hit of pandemic lockdowns and Russia's war in Ukraine sent UK inflation to a 41-year high. That shock ended the luxury of treating inflation as background noise. It's now more than ever a risk every retirement plan has to confront.

Over the past 75 years, average inflation as measured by the Consumer Prices Index including owner occupiers’ housing costs (CPIH) came in at 5.8% per annum between 1950 and 1988, dropping to around 2.6% from 1989 to April 2022.

The first figure was skewed upwards by runaway rates in the 1970s, so let's take 3% as a reasonable ballpark figure. Even at this fairly tame level, your living costs double in a little over two decades.

Put another way: if you're comfortable on £50,000 today, by year 20 you'd need close to £100,000 just to tread water, as shown on the chart below:

To get around this problem, you need to "index" your withdrawals, meaning you deliberately increase the amount you take out each year in line with inflation.

So, if you retire today on a £50,000 budget and inflation runs at 3%, next year you'd plan to withdraw £51,500, the year after about £53,000, and so on. The State Pension helps by ratcheting up with the "triple lock", but the rest is on you. If you don't index your withdrawals, a £50,000 lifestyle today could feel like a £25,000 one by the time you hit your 80s.

The application for someone planning today is simple: don't just work out what you need now but project how that number will grow over time, and make sure your retirement pot and investment strategy can sustain that rising income without running dry.

What's a "safe" withdrawal rate?

The much-cited 4% rule was born out of American research in the 1990s.

As a rule of thumb, it's seductively simple: take 4% of your pot in year one, lift that pound figure each year in line with inflation and historically a balanced portfolio usually lasts three decades.

A £1 million pot means £40,000 in year one, £40,800 in year two if inflation runs at 2%. The model assumes a 50/50 mix of shares and bonds and has been tested against both booms and busts.

The 4% rule, simplified

How it works

Withdraw 4% of your pension pot in the first year of retirement.

Increase that amount each year in line with inflation, so your spending power stays the same.

Example

£1 million pot → £40,000 in year one.

If inflation is 2%, take £40,800 in year two, £41,616 in year three, and so on.

There are obvious limits. The numbers were drawn from US markets, not the UK, and on a fixed 30-year horizon. It was also built to be cautious, which is why many who followed it underspent and left large sums behind. More recent updates reflect today's yields and valuations.

Morningstar, for instance, publishes an annual study that models returns and inflation using its own long-term forecasts. Their 2023 paper assumed a 30-year retirement, a 90% probability of not running out of money, and a system where you withdraw the same inflation-adjusted pound amount each year.

Compared with 2022, bonds were offering higher yields, cash savings accounts were paying more interest, and inflation forecasts looked a bit tamer. Because of these changes, the safe starting withdrawal rate rose to 4% in 2023. But in 2024, it was cut back to 3.7%, since stock market return forecasts were less optimistic.

Applied to £2 million, 3.7% is £74,000 in year one while 4% is £80,000. Both figures then step up each year with inflation so that spending power stays level. If prices rose 3%, year two would see roughly £76,220 or £82,400 depending on the starting rate. This is the point of indexing: without it, living standards slip as costs creep higher.

The truth is, no rule is perfect for everyone. Markets, inflation, and your own spending needs can all shift in ways no formula can fully predict. Think of the 4% rule (or any single number) as a starting point, not a guarantee.

The uncertainty of market returns (and why timing matters)

Retirement planning depends not only on market returns over the long haul, but also when those returns show up. A bad run in your first few years of retirement can cripple a portfolio, even if the average return over 20 or 30 years looks respectable on paper. That vulnerability has a name: sequence risk.

Let's say two retirees start with £1 million each, and they make yearly withdrawals of £50,000 increased by 3% annually (to keep up with inflation).

If retiree A hits a market crash in year one of 25% while retiree B cruises through fifteen years of 7% per year gains before facing a downturn of the same magnitude, the outcomes are worlds apart.

Retiree A runs out of money in 21 years while retiree B still has £608,357 left. Keep in mind that this happened despite both retirees enjoying a healthy 7% return in every year with the only exception being when the market crash hit. Early losses bite harder because you're forced to sell more when prices are low, shrinking the base that fuels future growth.

Year	Retiree A	Retiree B
1	£712,500	£1,016,500
2	£707,270	£1,032,550
3	£700,021	£1,048,070
4	£690,561	£1,062,974
5	£678,686	£1,077,168
6	£664,173	£1,090,548
7	£646,783	£1,103,005
8	£626,260	£1,114,417
9	£602,326	£1,124,654
10	£574,683	£1,133,575
11	£543,011	£1,141,025
12	£506,966	£1,146,841
13	£466,175	£1,150,841
14	£420,241	£1,152,833
15	£368,734	£1,152,608
16	£311,194	£806,032
17	£247,126	£776,603
18	£175,997	£742,538
19	£97,237	£703,435
20	£10,231	£658,863
21	£0	£608,357
22	£0	£551,416
23	£0	£487,503
24	£0	£416,042
25	£0	£336,410

And expressed a little more dramatically on the graph below:

In short, if your portfolio is forced to endure a crash like 2008 or the Covid plunge, the damage it does to your retirement is most brutal if it strikes at the start of retirement. If it comes later, after your pot has had time to compound, the damage is easier to absorb.

What can you do about sequence risk?

Given market meltdowns can show up at any moment, early or late in the course of retirement, it's not enough to just hope that your pension pot escapes being flattened by such an event.

Instead, you have to plan so that a downturn early in retirement doesn't spoil your golden years.

Keep a cash buffer

One approach is to keep a reserve of safe, spendable money. That could be a year or so worth of cash and a few years in short-term bonds. That buffer lets you cover living costs without selling shares at fire-sale prices. It works like a shock absorber, buying time for your investments to recover.

Stay flexible with withdrawals

Another is to avoid locking yourself into a rigid withdrawal rule. If your portfolio takes a hit, scaling back spending for a while protects its long-term health. Advisers sometimes dress this up with terms like "guardrails." The basic idea is intuitive enough: if your pot has suffered a terrible kicking, you take it easy on the withdrawals for a while to help it recover some of its value. The downside of this method is that in your retirement years when you'd hoped to be care-free you're instead left at the behest of market forces.

Diversity your portfolio

Diversification is another way to stabilise yourself against sequence risk. Shares provide the growth you need over a 20- or 30-year horizon, but they're volatile. Bonds and cash bring stability. A mix of the two cushions the early years while still giving you the chance to keep up with inflation.

Of course, this isn't an ironclad Newtonian law: as recently as in 2022, both shares and bonds fell hard, leaving investors who relied on the classic 50:50 allocation smarting on both sides of the portfolio. Diversification reduces the risk that any one asset class will sink you, but it doesn't abolish risk altogether.

Don't go all-in on cash

Finally, don't overcorrect. Playing it ultra-safe with everything in cash avoids market swings but leaves you exposed to inflation quietly eating away your spending power. Even in retirement, some growth assets are usually needed to make your money last.

Modelling your retirement with simulations

By now, you may be wondering how to pull all the moving parts together: life expectancy, market swings, inflation, changes in spending. This is where modelling tools come in handy. One of the most widely used is called a Monte Carlo simulation.

Despite sharing its name with the famous casino in Monaco, this strategy isn't about staking it all on red and hoping for the best. Monte Carlo is best thought of as a stress test for your plan.

Instead of just assuming your portfolio earns a steady 5% every year (which never happens in real life) and calling it a day, the programme runs your plan through thousands of "what if" futures: years of strong returns, years of poor ones, and everything in between.

At the end, you get a score that tells you how many of those simulated lifetimes worked out. For example, if you run 1,000 scenarios and in 850 you still have money left after 30 years, that's an 85% success rate.

Advisers suggest aiming for 85–90% on the grounds that trying to guarantee 100% practically guarantees you'll underspend and pass away with a large pile unspent.

The "right" target depends on how much you want to leave behind and how much risk you're willing to take. If the idea of even a 10% chance of running out keeps you up at night, or if you were hoping to leave a gift to family or a charity, you may prefer to aim for higher. The trade-off is having a more conservative lifestyle in retirement.

Many retirement calculators online now include Monte Carlo. You type in your age, assets, how much you plan to spend, and how your money is invested. Out pops a probability score: "Your plan has an 88% chance of lasting until age 95." Sounds good? If not, you can tweak the dials: spend a bit less, save a bit more, retire later, or invest differently. That in turns prompts it to re-calculate the odds.

You can return to the calculator every year and re-calculate your odds as life changes. Think of it as a periodic health check for your finances. If your probability improves after a good run, you might allow yourself a treat. If it drops after a bad year, you rein in spending or review your allocations. Either way, you're steering with data rather than guesswork.

Considering guaranteed income options

One way to take the uncertainty out of retirement is to hand part of the risk over to an insurer. That's essentially what annuities do. You pay in a lump sum and in return receive a guaranteed income for life, like creating your own private pension cheque.

Since 2015, UK retirees have had "pension freedoms": a rule change that scrapped the old requirement to buy an annuity with your pension pot. Now, you can choose whether to buy one, draw down gradually, or take cash lump sums. In 2023–24, 9.3% of first-time pot withdrawals went towards buying an annuity; that compares with over 90% pre-2015:

Period	Annuities sold	Percentage of first-time pot withdrawals who bought an annuity	What this means in plain English
Before Apr 2015	Very common	Over 90%	Before the rule change, most people used their pension pot to buy a guaranteed income for life.
2021–22 (financial year)	68,514 contracts	9.7%	Only a small minority chose an annuity. Most people used drawdown or took cash instead.
2022–23 (financial year)	59,163 contracts	8%	Annuity buying dipped when rates were lower.
2023–24 (financial year)	82,061 contracts	9.3%	Sales rose as annuity rates improved, but annuities were still a minority choice.

But for some retirees, annuitising part of the pot still makes sense. You might decide to cover the basics (housing, food, heating) with a lifetime annuity plus your State Pension and keep the rest of your portfolio invested more flexibly. That way, your essential outgoings are covered no matter how long you live, or what markets do.

The trade-off is that once you hand your lump sum over, it's gone. You've lost the flexibility of having a large pot to play with, and you're back to making do with periodic payouts (a bit like being back on a salary). If you were unfortunate enough to receive a life-limiting diagnosis early on in your retirement, you might regret having given away so much of your pot for a stream of small payouts. One way to reduce that risk is to add features like a guaranteed payout period or a spouse's pension, so your income continues to a partner or estate even if you pass away early.

The upside, of course, is the certainty: if you live longer than you'd expected, you're guaranteed an income stream to cover the basics until the end, even if you end up living long enough to get a birthday card from the King or even make it into the Guinness Book of World Records.

Of course, even if you don't trade in your private pension pot for a guaranteed income stream, the State Pension effectively acts like an inflation-linked annuity. At the moment, the full new State Pension pays about £10,600 per year, with annual increases that match the highest of the Consumer Price Index (CPI) inflation rate, the average earnings growth, or a minimum of 2.5%.

Pecking order of withdrawals

When you start drawing money in retirement, the order in which you dive into each pot matters.

General Investment Accounts (GIAs) are usually the first port of call because they get hit by tax every year. ISAs are simpler: what you take out is tax-free. Pensions have been the ace in the pack, not just because of the tax relief on the way in and the 25% tax-free lump sum on the way out, but also because anything left unused has mostly sat outside your estate for inheritance tax.

That's about to change. From April 2027, most unspent pension funds will be pulled into the inheritance tax net. It doesn't erase the advantages of pensions (tax deferral, relief on contributions, flexibility on withdrawals) but it does mean the old advice to "spend everything else first and leave the pension until last" isn't quite as watertight.

The reality is there's no single pecking order. A lot of people will take just enough out of their pension to keep inside the lower tax bands, use up their annual capital gains allowance from a general account, and then lean on ISAs for tax-free top-ups. The mix depends on your spending needs and whether you're trying to leave something behind.

This is the point where proper financial advice really counts, because getting the sequence wrong can mean paying more tax than you need to, or your plan to give generously to your grandchildren or the Donkey Sanctuary gets derailed by a massive inheritance tax bill.

Why professional advice matters

We've covered a lot of moving parts: how much to take out each year, what order to draw down from your accounts, how to handle tax, whether an annuity belongs in your plan, and what to do if markets tank. It's not surprise most people's heads spin when they try to model this on their own.

This is where professional advice can earn its keep. A regulated financial adviser can build a plan tailored to you. They'll run the models, test the "what ifs," and make sure you're not paying more tax than you need to. They also keep an eye on the human side: stopping you panic-selling in a crash, or reminding you that you actually can spend a bit more when markets have been kind.

There's evidence it works. The International Longevity Centre found that people who took advice ended up with more assets and higher retirement income than similar people who didn't. A recent survey showed over three-quarters of advised clients felt financially better off, not just in pounds and pence but in confidence too.

Check out our guide on questions you need to ask a financial adviser before picking up the phone. That way, you'll be fully briefed and armed with Superman-style X-ray vision to see through the sales spiel to what really matters.

Bottom line

Build a plan that survives bad timing (cash buffer, flexible withdrawals), sanity-check it periodically with Monte Carlo, use tax-smart sequencing (ideally guided by a financial adviser), and consider buying an annuity to make sure your essential outgoings are guaranteed.

Market drama is practically guaranteed over a long retirement; the antidote is conservative assumptions, annual reviews, and regulated advice.

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