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Chris Exley DipFA
Creator of MoneyGeek | Financial Coach | Qualified Financial Adviser
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MoneyGeek Minute - Issue 2: Good news for your retirement...
Dear Reader,
I’ve been deep in financial planning and money conversations over the past few weeks.
Which, to be fair, is probably the best way to take my mind off long, wet Welsh winter days.
One conversation in particular stuck with me.
A reader told me she was planning her retirement income — and her “financial freedom” number using the 4% rule.
That made me wonder how many others are doing the same...
A quick recap of the 4% rule
For anyone unfamiliar, the 4% rule comes from research by Bill Bengen in the mid-1990s.
Using historical US stock and bond data from the 1930s onwards, he found that if someone retired with a 50/50 portfolio of equities and bonds, withdrew 4% in year one, and increased that income with inflation each year, they were unlikely to run out of money over a 30-year retirement.
So a £1m pot → £40,000 per year, rising with inflation.
It’s a useful rule of thumb.
But it was never designed to be a long-term planning tool!
But here's the truth:
There are key issues:
- It assumes spending stays flat in retirement
- It doesn’t account for lump-sum spending or changing income needs
- It ignores state pensions and defined benefit pensions
- It assumes a 50/50 portfolio (most people aren’t invested like this)
- It’s based on US data, not UK reality
In short: it’s a starting point, not a plan.
A simple example:
Meet Bill 🕺
- Age 30
- Contributing into an ISA (just to keep things simple — in reality he’d also use a pension)
- Contributions of £1000/mo increase with inflation
- Plans to retire at 60
Assume a 4% real return (after inflation).
By age 60, Bill ends up with around £700,000.
Using the 4% rule, that gives him roughly £28,000 per year in retirement income.
So far, so sensible...
Or is it.
Let's model this using more advanced tools...
Using the same assumptions, but this time factoring in the state pension - almost £12,000/yr from age 68, we run a full cashflow model rather than relying on a single rule.
Here’s what happens:
Bill is likely to die with over £1m.
You can see in the chart below how his investments effectively reach a critical mass, meaning from age 60, the growth sustains the income. And once the state pension arrives at 68, his investment starts to run away:
To me, that’s a life not fully lived — too much saving, too much caution, and not enough spending when it actually matters (60-70).
When we run 10,000 alternative market scenarios using historical data, only 1.4% of outcomes see him run out of money before age 100.
What if Bill Spent more?
Let’s push it further.
If Bill increases his withdrawal by 50%, taking £42,000 per year from age 60, does he run out of money?
The model says yes — but only just.
- He runs out at age 99
- Around 65% of scenarios still make it to age 100
Now let’s be realistic.
Will Bill still be spending £42,000 a year at age 80?
Probably not.
If we reduce his income need from age 80 to £30,000, the chance of running out of money by 100 drops to around 20%:
The difference between £28,000 and £42,000 a year in early retirement is huge.
And it’s often those early years — when you’re healthiest and most active — that matter most.
Rules of thumb are useful.
But retirement planning needs to reflect real life, not static assumptions.
That’s why I prefer modelling over rules — because the decisions that matter most rarely show up in a single percentage.
Check out my free modeller on Google Sheets - you'll need to make a copy of your own:
Or if you'd like to see how we can help build yours using our software - hit the link below to book a call.
Until next week!
Take care.
Chris.
