How can you make your pension last?

When you finally reach retirement, one of the biggest questions is how much you can ‘safely’ take from your pension savings so that they will last as long as you do. Withdraw too much, and you risk running out of money too soon. Withdraw too little, and you may not enjoy the retirement you’ve worked hard for.

That’s where the 4% rule comes in - a simple, time-tested framework for managing withdrawals sustainably and helping ensure your pension savings last for the long term.

What is the 4% rule?

The 4% rule was first proposed in the 1990s by financial planner William Bengen, who analysed decades of US market returns – including periods of high inflation and economic downturns – to find a withdrawal rate that could sustain an income for at least 30 years.

His research concluded that if a retiree took 4% of their pension savings in the first year of retirement and then adjusted that amount each year for inflation, they could navigate even the toughest markets without exhausting their savings - by keeping the rest invested.

Why inflation matters

Inflation is not your friend. It’s felt in everyday living expenses and over time it chips away at your buying power.

If inflation averaged 2% a year (the Bank of England’s long-term target) – £20,000 today would need to become £36,000 in 25 years just to buy the same goods and services. At 3%, it would need to rise to over £42,000.

That’s why linking withdrawals to inflation is essential. Without this adjustment, the real value of your income steadily erodes.

Here’s how inflation adjustments could look in practice over just one year:

Note: This example assumes 2% inflation and doesn't include any fees or charges, which would be deducted from the money you withdraw, as well as any tax deductions.

The benefits of the 4% rule

It’s not perfect, but the appeal of the 4% rule lies in its simplicity. It provides a clear framework to help retirees avoid one of the most common pitfalls – spending too much too soon.

In the early years of retirement, it’s easy to underestimate how long your money needs to last. The 4% rule acts as a kind of ‘brake’, setting a realistic pace for withdrawals. This can help ensure your investments continue to generate returns, even as you draw an income.

And because the rule adjusts for inflation, your income should broadly keep pace with the rising cost of living. Over the past 30 years, inflation has averaged between 2% and 3%, meaning that without such an adjustment, your buying power could have fallen by more than 40%. The 4% framework helps guard against that silent erosion.

Why flexibility matters

That said, no single rule can totally capture the complexities of modern retirement. Even Bengen himself later noted that 4% was intended as a ‘worst-case scenario’, based on historic conditions that may not fully reflect today’s global economy.

There are two main drawbacks to relying too heavily on the rule.

First, markets don’t move in straight lines. A long period of volatility early in retirement - known as sequence risk - can significantly impact how long your savings last, even if long-term returns remain strong.

Second, your spending patterns are unlikely to stay fixed. Many retirees spend more in the early years when they are more active and less later on.

So, the 4% rule is a guide, not a rigid plan. It also doesn't allow for any tax that might be applicable to withdrawals, so you'll need to factor this into your own workings. A more sustainable approach might be to review your withdrawal rate regularly, allowing for both market performance and changes in your lifestyle.

And let’s not forget… we’re living longer.

The longer we live, the more important it becomes to think about how you can make your pension pot last. Life expectancy for a 65-year-old today is over 20 years for men and nearly 23 years for women – and one in four can expect to reach their 90s.^*

In reality it means your withdrawal strategy needs to evolve alongside your needs and the markets. Combining the 4% rule with a flexible approach and reviewing it annually can help your pension savings last as long as you do.

*Source: Office for National Statistics - Life expectancy calculator