“How much do I need for retirement?”
It’s a question most of us ask at some point, and one without a simple answer. None of us can know exactly how long retirement will last, or what life will look like decades from now. That’s why rules of thumb have become popular, and a well-known one is the “4% rule”.
The history of the 4% rule
The 4% rule was first outlined in the 1990s by US financial adviser Bill Bengen. He wanted to understand how much his clients could withdraw from their portfolios each year without running out of money, even if markets fell in the early years of retirement.
Bengen analysed market data going back to 1926, using a portfolio split evenly between shares and bonds. He tested different withdrawal rates over 30-year retirement periods, including times when markets were in deep decline. His findings:
A 3% withdrawal rate would have lasted 50 years, but was considered overly cautious.
A 4% withdrawal rate would have lasted at least 30 years in every historical scenario he modelled.
This became the “safe withdrawal rate” benchmark that has shaped retirement planning ever since.
How the 4% rule works
The principle is straightforward:
In the first year of retirement, withdraw 4% of your portfolio.
In subsequent years, increase that dollar amount in line with inflation.
For example:
A $1 million portfolio → $40,000 withdrawal in year one.
If you want $60,000 a year, you would need a starting portfolio of about $1.5 million ($60,000 ÷ 0.04).
The rule works both ways — from lump sum to income, or from income target to lump sum needed. This makes it easier to set tangible goals, rather than focusing on an abstract figure like “$1 million saved”.
Why it matters
The 4% rule provides a framework for linking your savings behaviour today with your lifestyle expectations in retirement. Instead of guessing at a lump sum, you can think in terms of an income stream. For example:
“I want $80,000 a year in retirement” → implies a starting balance of around $2 million.
For younger investors, it offers a way to turn long-term goals into something more concrete.
Important caveats
Like any rule of thumb, the 4% rule has limits. A few key considerations:
Life expectancy: Bengen’s original work was based on a 30-year retirement. Many people now live longer, so income may be needed for 35–40 years or more.
Spending patterns: Retirees often spend more at the start of retirement, less in the middle years, and more again later (e.g. healthcare costs).
Inflation: The model assumes steady adjustments, but real-world inflation can be unpredictable.
Taxes: Withdrawals may be taxed differently depending on the type of investment account (this could include KiwiSaver, UK pension transfers, PIE funds, or other structures).
Market conditions: Current investment returns may differ from the historical averages Bengen used.
What this means in New Zealand
While the 4% rule was developed in the US, it can still serve as a useful benchmark here. A few local factors make a difference:
NZ Superannuation: For most people this will probably form part of their retirement income.
Housing: Being mortgage-free typically reduces your required income significantly.
Investment structures: The rules for KiwiSaver, UK pension transfers, and PIE-taxed funds all affect net returns and withdrawals.
Putting it into practice
The 4% rule can be a valuable starting point for planning. For example:
“I want $60,000 a year in retirement” → suggests a portfolio of around $1.5 million.
But it’s important to remember this is a general guideline, not a personalised plan. Your circumstances such as health, lifestyle, family, tax position, and retirement goals will shape what’s realistic for you.
The 4% rule is a useful tool for estimating retirement needs, but it isn’t one-size-fits-all. At Pension Transfers, we can help you adapt this framework to your own situation: whether you’re still saving, considering transferring a UK pension, or already in retirement.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.
