What is the 4% Rule?
The "gold standard" rule of thumb for retirement spending. But does it still hold up in today's economy?
The Basics
The 4% Rule states that you can withdraw 4% of your portfolio's initial value in the first year of retirement, and then adjust that pound amount for inflation every subsequent year, with a high probability of not running out of money for 30 years.
Example Calculation
If you retire with a £500,000 portfolio:
- Year 1: Withdraw £20,000 (4% of £500k).
- Year 2: If inflation is 3%, you increase the withdrawal by 3%.
£20,000 + (£20,000 × 0.03) = £20,600. - Year 3: Adjust the £20,600 by Year 2's inflation rate, and so on.
Where Did It Come From?
It was introduced by financial advisor William Bengen in 1994. He analysed historical market data (US stocks and bonds) to find a withdrawal rate that survived every 30-year period in history, including the Great Depression and the high-inflation 1970s.
Later, the famous "Trinity Study" (1998) by professors at Trinity University corroborated his findings, popularising the rule further.
Is it Safe for UK Investors?
Why it might work
- It provides a steady, inflation-adjusted income, which is great for budgeting.
- It's simple to understand and implement.
- Historically, it has a high success rate (95%+ in US data).
Why use caution
- UK vs US Data: UK markets have historically had lower returns than the US. Some researchers suggest a 3.0% - 3.5% rate is safer for the UK.
- Longer retirements: If you retire early (e.g., at 40), you need your money to last 50+ years, not just 30. This lowers the safe withdrawal rate.
- Valuations: When stock market valuations are high, future returns tend to be lower.
How to Use Delphina to Check Your Rate
Don't guess. Use our tools to test if a 4% withdrawal rate will work for your specific portfolio and timeline.