As a retiree, working out how much income to draw from your pension is one of the most difficult decisions you’ll face.

Draw too much and there’s a risk you’ll deplete your pension pot too quickly. Draw too little and you might not have enough money to enjoy your newfound freedom.

To help retirees navigate the complexity of Income Drawdown, experts have come up with a range of ‘rules’. The most common is the 4% rule, under which you withdraw 4% of your pension each year, adjusting for inflation.

Now, the 4% rule has come under attack, with reports arguing it is unsustainable and could result in retirees running out of money. My view is that the 4% rule isn’t dead but has been used in a way in which it wasn’t intended. Ultimately, any type of financial strategy should be based on your individual needs and goals.

Read on to find out how to draw income in retirement.

The 4% rule is useful – but it shouldn’t be used in isolation

I recently read an article in Money Marketing in which Steve Webb, the former Pensions Minister, warned that the 4% rule is ‘almost certainly now the wrong answer’ to the question of how to draw income in retirement.

Webb argued that much of the analysis underpinning the 4% rule was based on historical US data, failed to consider the impact of investment charges, and was based on market conditions that we would no longer recognise.

Although it’s true that interest rates were much higher when the rule was established in 1994, this doesn’t necessarily mean the 4% rule is completely irrelevant.

As Abraham Okusanya, the founder of Timelineapp, points out, the 4% rule was never intended to be Newton’s Fourth Law of Motion. Instead, it was designed to be a framework that can be applied to each retiree’s individual circumstances.

So, instead of blindly applying the rule, you need to think about your own spending needs, asset allocation and investment time horizon.

It’s worth bearing in mind that the 4% rule was based on a 30-year retirement which, for some retirees, may prove insufficient. According to the Office for National Statistics, a 67-year-old man has a 2.8% chance of living to 100 and a 67-year-old woman has a 4.7% chance of living to 100. Depending on when you retire, your money might need to last around four decades.

Retirement spending isn’t linear

The problem with using the 4% rule in isolation is that it assumes retirement spending is linear. For most of my clients, this isn’t the case.

Usually, people’s spending needs change throughout retirement. In the first few years, spending tends to be high as you tick off items from your bucket list. This is usually followed by a period of stabilisation, after which your spending might start to decline as you get older. In the last few years of retirement, your spending could increase again to cover the costs of long-term care.

Living by a rule doesn’t enable you to increase and decrease withdrawals as and when required. In my experience, taking a flexible approach is much better than sticking to a rigid rule.

Withdraw how much money you need

Following a rule of thumb makes things simpler, but it’s no substitution for determining how much money you need in retirement. Everyone’s needs and goals are different and, as I mentioned before, they could change from one year to the next.

Your spending needs will depend on a wide range of factors, including what you do in retirement, whether you continue to work part-time, your family commitments, and your health. There is no ‘one size fits all’ approach.

It’s important not to withdraw money from your pension just because you can or because it fits a rule. Unless you really need the money, it’s usually better to keep it in your pension, where it’s shielded from tax and has the chance to benefit from stock market growth. If you’ve already withdrawn your 25% tax-free element, then the more money you withdraw from your pension, the more you’ll pay in Income Tax.

Bear in mind that retirement income doesn’t have to come from your pension. If you have other savings and investments, such as ISAs, it could prove more tax-efficient to withdraw money from these sources first.

Getting financial advice is essential

Deciding which withdrawal strategy to implement and then figuring out how to adapt it to your individual needs isn’t easy. Seemingly small mistakes could cost you in the long run, so it’s vital to seek independent financial advice before making any decisions.

A financial planner will look at lots of different factors, including:

• How much retirement income do you need?
• How do you want to access your money in retirement?
• Do you have any investments outside of your pension?
• What is your attitude and capacity for investment risk?
• Do you want to leave a legacy for your loved ones?

By getting to know you and your goals, I can help you decide how much money you need to live the retirement you desire without running out of money.

I use sophisticated financial planning tools that clearly show what impact your choices will have on your financial wellbeing in retirement. I’ll create a plan that’s tailored to you, so you can rest safe in the knowledge that your future is taken care of.

Get in touch

To find out more about how I can help you live the retirement you want, please get in touch. Email graeme@macfp.co.uk or call 01349 832849.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results. ​​​​​​