The 4% rule: does it work for UK retirees?

The 4% rule says that if you withdraw 4% of your portfolio in the first year of retirement, then raise that amount with inflation each year, your money should last about 30 years. On a £500,000 pot, that is £20,000 in year one. It is the most quoted rule of thumb in retirement planning, and one of the most misunderstood.

Where it comes from

The rule traces back to research by the American financial planner William Bengen in 1994. He tested withdrawal rates against historical US market data and found that roughly 4% was the highest starting rate that survived every 30-year period in his sample, for a portfolio split between US shares and US government bonds.

What it assumes

• A 30-year retirement. Retire at 55 and you may need 40 years or more.
• US market history, during a period when US markets performed strongly by global standards.
• A portfolio of roughly half or more in shares, held throughout.
• No fees or taxes, and spending that rises with inflation every year regardless of what markets do.

Why UK investors should be cautious

Studies that repeat the exercise with UK and international data have generally found lower sustainable starting rates than 4%, often nearer 3% to 3.5%, because returns outside the US were historically lower and inflation shocks were sometimes sharper. Platform and fund charges reduce the figure further. None of this makes the rule useless. It makes it a starting point, not a plan.

What the rule leaves out

• Other income: the State Pension or a defined benefit pension starting part-way through retirement changes how much you need from your portfolio, and when.
• Flexibility: most people can trim spending in a bad year. Even small adjustments improve a plan’s chance of lasting.
• Your actual portfolio: the rule was tested on one asset mix. Yours may behave differently.

A better way to test your plan

Rather than asking whether 4% is safe, ask how likely your own plan is to work: your pot, your asset mix, your spending and your other income, tested across many possible market paths. That is what a Monte Carlo simulation does. It replaces a rule built on someone else’s portfolio with a probability based on yours.

This article is general information, not financial advice. Projections are illustrative and capital is at risk.