Having worked hard to save for the next chapter of your life, once you’re ready to retire, you’ll be keen to generate a sustainable income from your accumulated pensions and savings.

Moving from growth to decumulation can present a number of challenges – one of which is how much income you should draw from your pension. Spend too much, and you run the risk of having a shortfall later in retirement. Spend too little, and you may prevent yourself from enjoying the retirement you’d hoped for.

With This is Money reporting that 48% of retirees worry about outliving their pension, it’s crucial to understand how you could use your wealth to provide an appropriate level of income throughout your retirement.

One strategy for extracting income from your pension is the “4% rule”

Devised by US financial planner William Bengen in 1994, the 4% rule was once thought to be a useful way to work out how much you could take from your pension each year.

In short, Bengen believed that making 4% withdrawals each year would provide a comfortable retirement while still allowing for growth.

This may sound like a simple and effective retirement strategy. But look closer and you might discover that while this rule may be a reasonable starting point, it won’t necessarily meet your unique needs.

So, read on to find out why relying on the 4% rule may be unwise, plus how bespoke financial planning could help you draw a sustainable retirement income.

4 compelling reasons the 4% rule may not be right for you

1. You may have other investments to draw on

Narrow in its scope, the 4% rule only considers how you could use your pension savings to generate your retirement income.

And yet, if you’ve enjoyed a successful career and diligently saved for your future, the chances are you’ll have assets and investments that you don’t hold in a pension.

For example, you may have a combination of dividends, ISA investments, or income from buy-to-let properties, all of which could be utilised to enhance the income you receive from pension payments. Plus, the State Pension may provide a reliable boost when you stop working.

If, on the other hand, you don’t have additional forms of income, your personal pension will need to stretch further.

A sensible way to manage your retirement and provide yourself with peace of mind that your savings will last a lifetime is to stick to a financial plan designed around your specific needs and circumstances.

2. The rigid rule doesn’t account for your fluctuating income needs

While it may not be easy to calculate how much money you’ll need throughout your retirement, it’s important to recognise that it’s unlikely to remain at the same fixed amount.

In fact, each stage of retirement will change how much you might need:

• On the go – During the early stages of retirement, there’s a strong chance you’ll spend more on travel, hobbies, or home improvements.
• Slowing down – While you may be slightly less active, you’re still busy with hobbies, but you may be less inclined to long-haul travel.
• Coming to a stop – In later life, your mobility may be more limited, and you could require care.

Understanding that your income needs are likely to change, cashflow modelling can be a helpful tool to illustrate whether your savings are sufficient to support you throughout your life.

Your financial planner can input data such as your current assets and savings, key event dates such as your expected retirement date, and any financial commitments you have now, or in the future. To forecast your future income, the software makes assumptions about the expected returns on investments, and how inflation might change things.

By regularly reviewing your cashflow model, you will understand how much income you are likely to need. Then, together with your planner, you can decide the best options for how to generate the appropriate amount, taking your pension and other assets into account.

3. Increasing life expectancies mean your pension may need to last longer

Bengen devised his 4% rule on the basis that retirees need to create a retirement income for 30 years. But with life expectancy increasing, there’s every chance that your retirement could last far longer.

Data from the Office for National Statistics reveals that:

• A man aged 55 has an average life expectancy of 84 years and a 4% chance of living to 100
• A woman aged 55 has an average life expectancy of 87, with a 7% chance of living to 100.

So, if you decided to access your pension at age 55, it may need to last you for more than 40 years.

As life expectancies continue to rise, so too does the chance that you’ll need to draw on your pension for longer. As such, applying the 4% rule could prove a risky strategy.

4. Investment volatility means returns cannot be guaranteed

Another problematic assumption the 4% rule makes is that your investment returns will continue to grow throughout your retirement.

Yet investment returns cannot be guaranteed, and the value of your pension fund will fluctuate.

Though periods of short-term volatility needn’t affect your long-term financial plan, they could have an impact on your withdrawals in the short term.

When markets fall, you may find you need to sell more invested units to achieve the same level of income. This could deplete your fund faster than expected, making budgeting and managing your withdrawals that much harder.

Get in touch

Whether you’re on the road to retirement or already there, I can help you understand all available options for generating a sustainable income and support your lifestyle goals.

Email me on a.douglass@grosvenorconsultancy.co.uk or call my office on 01793 766 123. Alternatively, call my mobile on 07525 177 046.

While I offer high standards of service and will work with you to ensure any plan is right for you, I’m also a busy mum, so work Mondays and Tuesdays only.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate cashflow planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.