Is the 4% rule on withdrawals from SIPP still prudent?
13 September 2021
Question by Linda
Is the 4% rule on withdrawals from SIPP still prudent? Latest valuation circa 983k, aged 58 , and retired 2 years ago. Didn’t take 25% lump sum. Getting closer to LTA but not overly concerned with that! What sort of annual returns would be deemed ‘ acceptable’ in today’s market? Thanks, Linda
Answered by Helena Wardle
That’s a very good question, and thinking about making sure you draw a sustainable level of income is essential. The 4% rule is US-based and does not necessarily give UK retirees a good guide on its own. I will explain some ideas to help you think about other factors to consider that may help. To understand retirement sustainability, I really recommend Abraham Okasanya’s book called “Beyond the 4% rule” it is an excellent read on retirement and risks to think about, and it’s written in a manner that won’t send you to sleep.
Your retirement journey could be 30 plus years long, and what you spend and need will change over that time. For example, in 9 years time, your state pension would start, which would increase your income. This may mean that you need to draw more between now and then to enjoy the lifestyle you want, and in my experience, this really varies from person to person, which the 4% rule doesn’t account for.
My advice would be to work out what enough looks like for you and to plan ahead to understand what your sources of income would be and how they fit together. It is incredibly important to work through the planning for this and to be clear on your options. Make it simple. Look at what you spend now and what is most likely to change. Do you have one-off expenses that you need to plan for? Map out the journey but use it as a guide only; 30+ years is a long time a lot can and will change. Be realistic and don’t forget the small stuff that is important to you, meeting friends for coffee, going out for day trips etc.
The easiest way to work out if your numbers are right is to look at what you had coming in as income when you were working, deduct the spending that has definitely stop and add any new spending that may have started since you retired. It’s a great starting point, and it gives people a lot of clarity on what they may need. Most of us would have more than one income in retirement, and it helps to work out what elements would be needed for your basic living needs, what do you need for all the fun stuff that you plan to do and what else would be important to you, such as looking after your family or yourself if you need help when you are older.
As a financial planner, I would use cash flow forecasting tools to help clients visualise this, and there are online tools available that you can use to do the same. I think with the complexity of Lifetime allowance that good financial planning would be valuable to you, and it would be worth considering.
I hope this helps and gives you some ideas to think about.