Pensioners can choose to follow a “4% rule” to help them avoid running out of money during their retirement. Financial planner William Bengen devised the scheme after analysis of hypothetical retirement scenarios in a range of economic circumstances. He discovered that following the rule would allow even those who retired at the worst possible times to fund their lifestyles for 30 years.
It involves withdrawing 4% of your pension pot in the first year of retirement, and increasing this in line with inflation every year thereafter. Those who are able to take out more each year will be able to fund their retirement for more than 30 years and perhaps even have money to leave their family when they die.
Mr Bergen’s original research was published 30 years ago and takes into account financial disasters such as the Wall Street Crash and Great Depression.
Even after taking these worst case scenarios into consideration, pension pots did not run out when following the 4% rule.
Pensions should, however, keep an eye on markets and inflation to make sure the scheme continues to be sustainable in the future.
This comes as millions of state pensioners could see their payment rates rise by more than £500 from next April, based on official wage figures.
The Office for National Statistics (ONS) reported that total pay grew by 4.7% in the three months leading up to July.
Under the triple lock, the state pension increases by either average earnings growth, inflation, or 2.5% – whichever’s highest.
As inflation is expected to be lower than wage growth, with most anticipating an increase of 4% to be announced in September, the wage figure is likely to be used for the calculation.
However, the figures may be revised in next month’s data, and the Government will confirm the planned increase in the autumn.
James Norton, head of retirement and investments at Vanguard Europe, said: “The state pension is key to most people’s retirement plans.
“The fact that it’s increasing is good news for retirees, because much of their basic expenditure will be covered with this guaranteed income.”
