- The 4% Rule is a popular ‘rule-of-thumb’ that suggests you can safely withdraw 4% of your retirement savings each year and increase that withdrawal in line with inflation, with little risk of running out of money during a typical 30-year retirement.
- Your personal retirement income strategy will depend on things like your tolerance for investment risk, your age at retirement, the income you need when retired and whether you have any other sources of income.
When we are saving towards retirement, it helps to have an idea of how much income we will be able to replace using those savings once we stop earning. While the State Pension will provide some income from our late sixties – currently 67, it’s likely that we will want to supplement that with additional retirement savings of our own. This short guide explores the topic of withdrawing a retirement income and sheds some light on several essential concepts.
What is the 4% Rule?
The 4% Rule is a popular ‘rule-of-thumb’ that helps us estimate what level of income we can withdraw sustainably from our retirement savings. While on the surface, the 4% Rule is a simple idea, there is considerable research and analysis to back it up. The 4% Rule has been widely adopted as a guide, since the early 1990’s when William Bengen, the financial planner who originally published the research, used historical market data to assess the likelihood of retirees running out of money.
Planning the right retirement income strategy for your own situation is nuanced, however. There are various personal and financial factors to bear in mind. Your personal retirement income strategy will depend on things like your tolerance for investment risk, your age at retirement, the income you need when retired and whether you have any other sources of income. Financial factors like market performance and the prevailing rates of inflation in retirement will also play a significant role in how long your retirement savings will last.
