The 4% Rule

One of the hardest questions in retirement planning is: "How do I make sure I don't run out of money?"

Enter the 4% Rule.

What is it?

The rule suggests that you can withdraw 4% of your invested portfolio in the first year of retirement, and then adjust that amount for inflation every subsequent year, with a very high probability (95%+) that your money will last for at least 30 years.

Calculating Your "Freedom Number"

You can use the rule in reverse to calculate how much you need to save.

Formula: Annual Expenses x 25 = Freedom Number

• Example: You need £30,000 a year to live comfortably.
• Calculation: £30,000 x 25 = £750,000.

If you have £750,000 invested, 4% of that is £30,000.

Does it still work?

The rule comes from the "Trinity Study" (1998) using US stock/bond data. Critics argue that with lower future expected returns and longer lifespans, 4% might be too aggressive.

Adjusting for Safety

Many modern planners suggest a more conservative range, closer to 3.5% or 3.3%, especially if you retire very early (e.g., in your 40s) and need the money to last 50+ years.

• 3.5% Rule: Annual Expenses x 28.5
• 3% Rule: Annual Expenses x 33

Flexibility is Key

The 4% rule assumes you blindly take the inflation-adjusted amount every year, regardless of the market crash. In reality, if the market tanks, you can simply spend a little less that year (skip the big holiday). Being flexible drastically increases the success rate of your portfolio.