How does the 4% withdrawal rule work?
The 4% rule is known as a sustainable investment withdrawal rate. It was developed in 1994 by US financial planner William Bengen after he looked at historical stock and bond market performance. The rule is based on a hypothetical investment portfolio of 50% stocks and 50% bonds. Your pension is likely a diversified portfolio - which means the investments are spread across different stocks and bonds, geographies and sectors. If you’re a PensionBee customer, you can see your plan’s investment type and location on the Plans page.
Withdrawing 4% of your pension investment each year, and adjusting for inflation at 2%, could mean your savings last 30 years or more. Taking just 4% of your investment each year means most of the money should be interest and investment growth. The 4% withdrawal rule assumes that you don’t make changes to your investments or withdrawal strategy, even during periods of market volatility. This is a sustainable withdrawal method because your spending is increasing based on inflation, not by how your investments have performed. Use our Inflation Calculator to see the impact inflation can have on your pension savings over time.
The 4% rule in practice
Here are a few examples. The table below shows:
how the 4% rule works with different pension pot sizes; and
how your withdrawals would need to increase each year at an inflation rate of 2%.
| Pension pot size | Withdrawal in the first year of retirement | Withdrawal in the second year of retirement |
|---|---|---|
| £100,000 | £4,000 | £4,080 |
| £300,000 | £12,000 | £12,240 |
| £500,000 | £20,000 | £20,400 |
| £1,000,000 | £40,000 | £40,800 |
The rule doesn’t take into account fees. Any charges you pay (for example, in annual management fees) would be paid from the money withdrawn.
Who is the 4% rule for?
The 4% rule can be useful for retirees who’ve opted for drawdown as it assumes your pension savings continue to stay invested once you retire. The 4% rule could work for you if:
you have no other income sources and are only using your pension as retirement income; or
you have a 30-year retirement horizon as the model is designed for individuals who expect to retire around 65 and expect their savings to last until their mid-90s.
However, this rule may not be ideal for everyone. For example early retirees who need their savings to last more than 30 years or those with variable expenses.
Pros and cons of the 4% withdrawal rule
You should carefully consider the 4% rule before using it as a guideline when withdrawing from your pension. There are both pros and cons to using it as a withdrawal strategy.
Pros of the 4% rule:
it’s easy to understand and apply;
it can help you withdraw a sustainable amount, reducing the risk of running out of money;
it’s backed by decades of market performance; and
it suggests increasing withdrawals to match inflation, which means you can maintain your purchasing power.
Cons of the 4% rule:
it assumes consistent withdrawals, which may not align with real-life expenses such as healthcare costs or unexpected emergencies;
if the stock market goes down drastically, the 4% model might not work as well especially in early retirement;
it assumes a relatively stable inflation rate of 2% which could change over time; and
it doesn’t account for individual differences, such as life expectancy, risk tolerance, or other sources of income.
The 4% rule can be a helpful starting point for retirement planning. It offers a simple strategy for maintaining sustainable withdrawals. However, it’s not a one-size-fits-all solution. It’s important to consider your personal circumstances and adjust the rule as needed. For example, in line with your individual expenses, life expectancy and risk tolerance.
Where to get pension withdrawal guidance
Retirement planning is individual and can vary from person to person. Our Retirement hub has lots of resources including retirement checklists and withdrawal tools like our Drawdown Calculator.
If you’re over 50 and want to understand more about your retirement options, consider booking an appointment with Pension Wise. They’re a government-backed service who can run you through the different options and answer any questions you might have. The appointments are completely free and impartial and you can book via the MoneyHelper website. Watch or read about Financial Journalist and Founder of Much More With Less, Faith Archer’s experience with Pension Wise.
Risk warning
As always with investments, your capital is at risk. Past performance isn’t an indicator of future performance. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 28-05-2025
