My two favourite retirement rules of thumb

16 February 2017

I like rules of thumb relating to retirement, because sometimes the best advice is the simplest. Here are my two favourites:

  • Contribute a percentage of your salary each month equivalent to half your age when you started a pension.



  • To make sure your retirement lasts, never withdraw more than 4% a year.


But while they're useful as rough guidelines, rules of thumb often oversimplify complex issues in ways that can harm long-term financial prospects.  

Saving ‘half your age’ for retirement will only work if you are going to be happy with the lifestyle it will provide. For more on this read How much should you pay you’re your pension? And it won’t be possible if you’re one of the four million Brits living on ‘inadequate income’.

This week the '4% rule', the amount that retirees can safely withdraw from their pension pots, has been described as outdated. Research found a 65-year-old entering drawdown in a low-risk portfolio today and taking 4% each year has a one in five chance of running out of money within 30 years.

But some think the concerns are not justified. Claire Walsh, a chartered financial planner and head of advice at Unbiased says: “I think most would be fine with this - they want to use their money up! Only around 1 in 10 of will live past 95 anyway.”

Meanwhile, Moneywise reader ‘Portland Bill’ says: “If all our capital runs out when I and my wife reach 95, I think we'll have judged it just about right!  If we have to live off just the state pension when we're 95, I think we'll manage as I'm sure we'll not be quite so active by then.”