Does the “4% Rule” work for pensions in a pandemic?

Does the “4% Rule” work for pensions in a pandemic?

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult an independent financial adviser.

Whether you are an experienced retirement planner or just starting to think about life after work, the 4% Rule is an important idea to consider. Developed by William Bengen in 1994, the crucial idea is to establish a “safe rate of withdrawal” from your pension (or wider investments) to live on comfortably in retirement – without running too high a risk of running out of money. Bengen argued that someone could safely take out 4% each year – adjusted for inflation – and be fairly certain that this would last them for at least 30 years.

However, in 2020 this idea has come under sharper criticism – especially as falling stock prices earlier in the year widely compressed the value of pension pots in the developed world. In this post, our financial planning team here at Cedar House offers some thoughts on the 4% Rule in 2020 and particularly its viability in light of the pandemic.

We hope you find this content helpful, and invite you to contact our team here at Cedar House for more information or to access personalised financial advice:

020 8366 4400 or


How the 4% Rule works

Imagine you have a portfolio of investments – perhaps held in a pension – worth £300,000 in today’s money. Taking 4% of this each year would total £12,000; or £1,000 per month. Also, suppose that your portfolio grows by 4% in the same period. Setting aside inflation and fees, therefore, you could theoretically retain much of your portfolio’s value whilst drawing an income from it. As such, by reverse-engineering this 4% Rule, some financial planners come up with the 25% Rule – i.e. estimating what level of income you will need each year in retirement, and then multiplying this figure by 25. So, if your best guess is that you’ll need £12,000 each year, then multiplying £12,000 by 25 leads you to a portfolio worth £300,000.

It sounds very neat, and certainly one of the advantages of the 4% Rule is that it focuses the mind. After all, one of the big mysteries many people want answered is the Golden Question: “How much will I need in retirement?” This approach provides a clear answer and goal to aim towards. Yet does it always work? Moreover, has COVID-19 and its effects on both the equity markets and wider economy changed the situation?


Drawbacks of the 4% Rule

One of the important things to state at the outset is that the 4% Rule is built on a set of assumptions. Firstly, Bengen’s research applies to a hypothetical portfolio invested 50% in stocks and 50% in bonds. Your portfolio may look very different as you approach retirement. As such, it may be that a different withdrawal rate would be “safer” for you. Secondly, whilst Bengen based his study on a fairly wide set of data (i.e. 1926 to 1976), it mainly focused on the USA. Other markets such as the UK, France or Canada might not have yielded similar results. 

Thirdly, even assuming that the data could be replicated across multiple countries, there is simply no guarantee that past performance will be repeated in the future. Fourthly, Bengen’s study offered a safe withdrawal rate assuming a 30-year retirement period. In 2020, at a time when life expectancies have broadly increased across the developed world, many people may be looking at retirements spanning 40 years or even longer. Finally, the pandemic in 2020 has raised questions about how the 4% applies during periods of economic uncertainty or recession. For instance, if your pension shrinks by 20% within such a period (as it might have done earlier this year), might continuing to withdraw 4% disproportionately affect the long-term growth and viability of your retirement fund? Might it be more sustainable either to temporarily reduce your withdrawals or draw upon other sources of capital (e.g. an ISA)?


The uniqueness of each case

Whilst it likely sounds like we’re pouring cold water on the 4% Rule, it is certainly true that it may offer a useful approach for certain individuals planning their retirement. The important thing to bear in mind, however, is to not assume that it applies neatly across all cases – and so means that you do not require a bespoke retirement plan for yourself. For instance, suppose you have two full new state pensions to draw from within your household in retirement (e.g. one from you and one from your spouse). Given that this income is guaranteed and linked to inflation at the time of writing, you might not need to withdraw 4% from your pension pots in your initial years of retirement. Rather, you could work with a financial planner to craft a strategy so that it continues to grow until the point when you might need it (e.g. when one of you dies – thus likely also taking their state pension with them).


Conclusion & invitation

Interested in discussing your mortgage or wider financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team via a free, no-commitment consultation:

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