If you’ve ever tried to work out how much money you need to retire, you’ve probably bumped into a strangely tidy number: 25 times your annual expenses. Save up that much, the argument goes, and you can spend roughly 4% of it each year for the rest of your life without running out of money. Whether you’re 35 and planning for an early retirement or 55 and figuring out when you can stop working, this single rule of thumb is doing more work than almost any other in retirement planning.
The rule has a name. It’s called the 4 percent rule, and it has a fascinating origin, several legitimate criticisms, and a level of usefulness that depends quite a lot on context. This post explains where it comes from, why it works, where it falls short, and what UK retirees specifically should know.
Where the 4 percent rule comes from
The 4% rule traces back to a 1994 study by William Bengen, a US financial advisor who looked at every 30-year period in US market history (going back to 1926) and asked: what’s the maximum percentage of a portfolio you could withdraw each year, adjusted for inflation, without running out of money in any of those periods?
He looked at thousands of starting points, varied portfolio mixes (stocks, bonds, cash), and tested how each combination would have held up across the worst periods in market history, including the 1929 crash, the 1970s inflation, and the 1973-74 bear market.
His conclusion: a portfolio of 50% to 75% stocks, with the rest in bonds, could safely sustain a 4% inflation-adjusted withdrawal rate over 30 years in essentially every historical scenario.
Soon after, three professors at Trinity University in Texas refined and expanded the work. Their 1998 study (the famous “Trinity Study”) tested withdrawal rates across different portfolio mixes and time periods, and broadly confirmed Bengen’s finding. 4%, with a stock-heavy portfolio, was the safe withdrawal rate. The figure stuck.
The implication: 25 times your annual expenses
The maths is simple. If 4% of your portfolio is what you can safely withdraw each year, then your portfolio needs to be 25 times the amount you want to withdraw.
So if you want to spend £40,000 a year in retirement (in today’s money), you need a portfolio of:
£40,000 × 25 = £1,000,000
If you want to spend £30,000 a year, you need £750,000. If you can live on £20,000 a year, you need £500,000.
This 25x rule is the FIRE movement’s foundational equation. It turns retirement planning from a vague “save what you can” into a specific target: work out what you’ll spend, multiply by 25, and that’s your number.
It’s a useful starting point. It is not, on its own, a complete plan.
Why the 4 percent rule works
The reason Bengen’s number was 4% rather than something higher comes down to one fact: the worst part of any retirement isn’t the average year, it’s the bad early years.
If markets fall sharply in the first few years of your retirement and you’re withdrawing at the same time, you’re selling assets at low prices to fund spending. Those sold assets aren’t there to recover when the market eventually rises. This is called sequence-of-returns risk, and it’s the technical reason Bengen’s rule isn’t 7% (which is roughly what stock markets have historically returned).
Most retirees, in most periods, could safely withdraw far more than 4%. The rule is calibrated to the worst-case historical scenario. It’s the rate that survived even the brutal 1966 retiree, who spent the next 16 years dealing with stagflation and crashes. The rule’s whole purpose is to be safe enough that even an unlucky retiree doesn’t run out.
This is also why the rule prescribes a stock-heavy portfolio. A more conservative portfolio (say, 100% bonds) would have lower expected returns and would actually fail more often at a 4% withdrawal rate, because bonds didn’t grow enough to outpace inflation during bad periods. Counterintuitively, holding more equities is what makes the 4% rule safe, not less.
The legitimate criticisms
The 4% rule isn’t gospel, and it has real weaknesses worth understanding.
It’s based on US data. Bengen used US stock and bond returns from 1926 onwards. The US has been one of the best-performing markets in the world over that period. UK equities have done worse over the same span, and many other markets have done much worse. Some studies suggest a globally diversified portfolio is fine at 4%, but UK-only retirees might want to be slightly more conservative.
It assumes a 30-year retirement. Bengen tested 30-year periods. If you retire at 50 and live to 95, that’s 45 years, and 4% may be too aggressive. The FIRE community often uses a more conservative 3% to 3.5% rate for very long retirements.
It ignores fees and taxes. The original rule looked at gross investment returns. Real-world investors pay platform fees, fund fees, and (outside ISAs and pensions) tax on dividends and capital gains. These can easily reduce your safe withdrawal rate by 0.5% to 1%, which is significant.
It assumes constant spending. In real life, retirees don’t spend the same amount in real terms every year. Most spend more in early “go-go” years and less in later years. The rule doesn’t account for this, which means it may actually be too conservative for many retirees.
It doesn’t account for the State Pension. UK retirees almost always have State Pension income on top of their private savings. This is a substantial cushion that the rule ignores entirely. For a UK retiree, the 4% target only needs to fund the gap between the State Pension and your desired spending, not your total spending.
Past performance isn’t future performance. The rule is empirical, based on the past 100 years of market data. The next 100 years could be different. Several researchers have argued that current valuations make a more conservative withdrawal rate (closer to 3%) the prudent assumption.
What UK retirees specifically should know
The 4% rule originated in US financial planning, so adapting it for UK retirees requires a few adjustments.
The State Pension changes the maths. A full UK State Pension in 2026/27 is roughly £12,000 a year, inflation-protected, paid for life. For a couple, that’s potentially £24,000 a year of guaranteed real income from State Pensions alone. This dramatically reduces how much your private portfolio needs to provide.
If you want £40,000 a year in retirement and you’ll receive £12,000 of State Pension, your portfolio only needs to fund £28,000 a year. At 4%, that’s a target of £700,000 rather than £1,000,000. For a couple, the difference is even bigger.
UK tax wrappers help. Withdrawals from a Stocks and Shares ISA are entirely tax-free. Withdrawals from a SIPP or workplace pension get a 25% tax-free lump sum, with the rest taxed as income. For most UK retirees, the personal allowance and basic-rate tax band mean that pension withdrawals are typically taxed at 0% to 20%, not the punitive rates that worry US retirees.
Pension flexibility post-2015. Since the 2015 pension freedoms, UK retirees have full flexibility over how to draw down their pensions. You can take the 25% tax-free lump sum at age 55 (rising to 57 in 2028), draw income flexibly, or buy an annuity if you want guaranteed income. The 4% rule applies to the drawdown route.
Different inflation history. UK inflation has been higher than US inflation in some periods, particularly the 1970s. A UK-specific safe withdrawal rate might be slightly more cautious than the US 4%.
For all these reasons, sensible UK guidance often suggests a slightly more conservative starting point of 3.5% for retirees who want strong safety margins, with the option to flex up to 4% or higher if markets perform well.
A full walkthrough of how to plan for and execute a UK retirement, including specific drawdown strategies, is the subject of Simple Investing for Retirement, which goes into far more depth than this post can.
The 4 percent rule for FIRE seekers
For those pursuing Financial Independence, Retire Early (FIRE), the 4% rule is the foundational equation. The whole movement is built around the idea of saving aggressively until you hit 25x annual expenses, at which point work becomes optional.
A few specific FIRE considerations:
Longer time horizons. A 40-year-old retiring may have 50+ years of retirement ahead. The 4% rule is calibrated for 30 years. Most FIRE practitioners use 3% to 3.5% as a more cautious figure, or they plan to remain flexible (cutting spending in bad market years).
The bridge to pensions. UK pension money isn’t accessible until 57. FIRE retirees in their 30s and 40s need their ISA and other accessible savings to bridge the gap until pensions become available. Simple Investing Guide to FIRE covers this bridging problem in detail, and explains how to structure your savings so you have enough accessible money to retire well before pension access age.
Flexibility beats precision. Most successful FIRE retirees don’t follow the 4% rule rigidly. They monitor their portfolios, reduce spending in bad years, take on occasional work if needed, and adjust over time. The rule is the starting point, not the final answer.
How to use the 4 percent rule properly
A practical framework:
- Estimate your annual retirement spending in today’s money. Be realistic. Include housing, healthcare, hobbies, travel, gifts, the lot. Most people underestimate.
- Subtract guaranteed income. State Pension forecast (check your forecast on gov.uk), any defined benefit pensions, anything else you’ll receive regardless of investment performance.
- The remainder is what your portfolio needs to fund. Multiply by 25 to get your target portfolio size.
- Adjust for caution. If you’re young, planning a long retirement, or worried about market valuations, multiply by 28 or 30 instead of 25 (using a 3.5% or 3.3% rate).
- Track your progress. A monthly check on your portfolio relative to the target is enough. You’re aiming for “definitely enough” rather than “exactly enough.”
- Plan for flexibility. Even after you hit the number, remain willing to adjust spending if markets do badly in the early years of retirement. This is the single biggest determinant of whether your money lasts.
| Want to know exactly how to plan and execute a sensible UK retirement? Simple Investing for Retirement covers the maths of safe withdrawals, how to structure ISA and pension drawdowns, and how to make your money last. [ Find out more → ] |
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The 4% rule isn’t a guarantee, and it isn’t perfectly tuned for UK conditions, but it’s the best simple starting point in retirement planning. It turns the impossible question “how much do I need?” into a specific target, and it gives you something concrete to work towards. Treat it as a guide rather than a rule, build in margins of safety, and check the maths every few years as your circumstances change.
This article is for information and education only and does not constitute financial advice. Investments can fall as well as rise in value and you may get back less than you invest. Past performance is not a reliable indicator of future results. Pension and tax rules can change. If you are unsure about the suitability of any retirement strategy, please seek independent financial advice.