If you reached age 60 with a £1 million retirement pot, how much would you feel comfortable spending?
Would you follow the traditional 4% rule and withdraw around £40,000 a year?
Would you spend £80,000 a year and make the most of the early years of retirement?
Or is there a more flexible approach that sits somewhere between these two extremes?
In our latest video, we tested all three options using retirement cash flow modelling.
The retirement scenario
Our example couple are both aged 60, mortgage-free and own a home worth £500,000.
However, we have not treated their house as money they can use to fund everyday retirement spending. Unless they sell, downsize or release equity, the property will not pay for holidays, household bills or day-to-day living costs.
Their accessible retirement assets total £1 million:
- £50,000 in cash
- £100,000 in investments
- Two pensions worth £425,000 each
They are also expected to receive two State Pensions from age 67.
For the purpose of the modelling, general spending increases by 2% a year and pensions and investments are assumed to grow by 5% a year.
These figures are not predictions or guarantees. They simply help us explore how different spending decisions could affect the couple’s long-term financial position.
Option one: following the 4% rule
The 4% rule would suggest an initial withdrawal of £40,000 a year from a £1 million retirement pot.
Under this scenario, the couple’s spending increases by 2% each year.
The withdrawals are relatively manageable during the early years. Their cash and investments are used first, while their pensions continue to grow.
Once their State Pensions begin at age 67, less of their annual expenditure needs to be funded from their savings and pensions.
The result is an extremely secure-looking plan.
By age 100, the model projects that they could still have approximately £3.3 million remaining in pensions and accessible investments. When their home is included, their total projected assets could be around £5.8 million.
These are nominal future values rather than figures expressed in today’s money. Nevertheless, the direction of the plan is clear: they are highly unlikely to exhaust their money under these assumptions.
For someone whose priority is maximum security or leaving a substantial inheritance, this may be entirely appropriate.
However, it also raises an important question.
Could they be spending too little during the years when they are healthiest and most able to enjoy their wealth?
There is clearly a risk in spending too much, but there can also be a risk in spending too little. You may preserve the money but miss the opportunity to use it.
Option two: spending £80,000 every year
At the other end of the scale, we tested spending £80,000 a year, increasing with inflation, throughout retirement.
Initially, the plan does not appear disastrous. The couple start with £1 million, and their State Pensions provide additional income from age 67.
However, the withdrawals eventually become too large for the portfolio to sustain.
Cash and investments are exhausted early, and the pensions are required to fund an increasing proportion of their expenditure.
Under this scenario, the couple’s accessible retirement assets run into shortfall at age 77.
That is far too early for most people to feel financially secure. Many people in their late 70s are still active, travelling, supporting their families and enjoying retirement.
The modelling therefore suggests that spending £80,000 every year, increasing with inflation, is unlikely to be sustainable for this couple.
Option three: spend more early and reduce later
The third option reflects the way many people actually want to experience retirement.
Instead of spending £80,000 every year, the couple spend more during their first ten years of retirement and then reduce their expenditure later.
Their initial spending consists of:
- £50,000 of core annual expenditure
- An additional £30,000 for holidays, travel and lifestyle spending
During the early active years, they therefore spend £80,000 a year. Once the additional lifestyle expenditure ends, their spending falls back to £50,000 a year.
This dramatically improves the plan.
Rather than running into shortfall at age 77, the first projected shortfall does not appear until age 88.
It is still not a perfect plan, and it would require further refinement. However, it demonstrates why retirement planning should not be reduced to a single withdrawal percentage.
The issue is not only how much you spend.
It is also when you spend it and how long that level of expenditure continues.
How could the flexible plan be improved?
If this were a real financial planning conversation, we would not simply accept a projected shortfall at age 88.
We might explore whether the couple could:
- Spend £80,000 for seven years rather than ten
- Reduce their later expenditure to £45,000
- Maintain a larger emergency cash reserve
- Temporarily reduce discretionary spending following poor investment years
- Plan pension withdrawals more tax-efficiently
- Downsize or release property wealth later in retirement
- Set aside a specific reserve for future care costs
We could also introduce spending guardrails.
For example, if the plan remains ahead of target at age 67, the couple could continue with their intended lifestyle spending. If investment performance has been weaker than expected, they could temporarily reduce holidays or other discretionary costs.
Retirement planning should not involve making one calculation at age 60 and then blindly following it for the next 30 or 40 years.
It needs to be reviewed and adjusted as markets, tax rules, spending requirements, health and family circumstances change.
The real lesson
The 4% rule can be a useful starting point, but it cannot understand your complete financial position.
It does not know when your State Pension will begin, whether your expenditure will reduce later, whether you want to help your family or how important leaving an inheritance is to you.
For this particular couple:
- £40,000 a year appears extremely secure and may be unnecessarily cautious.
- £80,000 every year runs into shortfall at age 77.
- Spending £80,000 during the early years and reducing to £50,000 later extends the plan to age 88.
The best retirement plan may therefore be neither the safest nor the most aggressive.
It may be a flexible plan that allows you to enjoy more of your wealth while you are younger, while retaining the ability to adjust if circumstances change.
Watch the full cash flow modelling demonstration here
If you are approaching retirement and would like to understand how much you could realistically afford to spend, you can book an initial call with us here:
📅 Book an initial call with us:
https://calendly.com/d/cyd7-rsd-k98/initial-call-ga
This article and the accompanying video are for general information only and do not constitute personal financial advice. The sustainability of your retirement income will depend on your pensions, tax position, investment returns, spending, health, family circumstances and objectives.
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