(Updated 26/06/2025 to include guidance on 4% rule)

The one thing that every young person knows about boomers is that we are all rich. Obviously we are not all rich but what is true is that there are a lot of middle class people who have done 40 years of 9-5 in business or public service and are considering retirement. They may own their house (OK Boomers!) and have some savings and pensions.

The problem is that once you reach 50 things start breaking and once you reach 60 you can’t keep doing a 9-5 with a hour’s commute. If you can’t get a “working from home” gig or part time work you have to consider early retirement.

This comes a big shock because having spent 40 years accumulating wealth thinking about spending it (“de-accumulating”) is very very difficult.

Here are some simple steps that will help you understand your financial position. Obviously this is not financial advice but it could contribute to your financial understanding.

How rich are you really?

Just add up this list of assets ,

• House
• Savings and investments
• Current Account
• State Pension = £250k per person (22.5 x £10,600 in 2025)
• SIPP value (if you have a Self Invested Personal Pension)
• Defined Benefit pensions at 22.5 x annual payout
• Defined Contribution pensions at 20 x annual payout

and subtract your mortgage, overdraft and other debts.

Drumroll….

This is your total wealth.

What income will this support?

Nominal Income = Total Wealth/25

So if your Total Wealth is £1m you could spend about £40k per year throughout your retirement (4% drawdown) on rent, food, bills and leisure activities. A couple could live comfortably on this amount.

But houses are not cash are they?

This calculation is just to give you an idea of how rich you are. There is a whole finance industry that exists just to help you turn illiquid assets into cash. If this is your problem you may wish to seek professional advice.

Understanding Lifestyle and Capital Spending

It is very helpful to understand that in early retirement you will have two sorts of spending,

• lifestyle
  • food, drink, car, holidays, physio
• capital
  • new hips, deposits for kids houses, new car, house refurbishment now you are going to actually live in it.

All the lifestyle expenses should come from your pension income. This is money that comes into your current account each month and then goes out again by direct debit to pay suppliers and credit cards. Note that this includes big expenses like holidays, golf club memberships and marina fees. You have earned your retirement and now is the time to budget to enjoy it.

All the capital should come from your savings.

Now,

• Work out you annual lifestyle expenditure
• Make a list of capital expenses by year (e.g. help son buy a flat in 5 years time £X).

Retiring Early and Balancing the Books

If you want to retire at 60 you may wish to let your defined benefit pensions mature at 65 (say) (seek professional advice). In this case you have to fund the “gap” until you get work or state pensions. You can use a SIPP or investment savings to pay for this. Use paper or Excel to create worksheet like this for the next 10 years

Year	Lifestyle Expenses	Capital Expenses	Total Expenses	Funding Sources (can be several)	Note
2025	25k	20k	45k	Savings	Do up house
2026	25k	0k	25k	Savings	ISA
…
2032	25k	100k (flat deposit)	20k 5k 100k	State Pen. Savings Savings	Pensions! Good. Flat deposit Bad.
… 2036

Is it affordable?

Now you have an expenditure and funding model you can check whether you can afford it. Simply add up all the money you have taken from your savings account. If it is less than your savings that is a great start.

If you are planning to drawdown on your savings to supplement your pensions and pay for your lifestyle expenses then you can use the 4% (or 5%) rule to check the affordablilty.

• If paying your own pension then you should only drawdown 4% of the capital each year.

The reasoning is that your investments should keep growing and this will mean that your capital will last for 25 years.

Planning for 70-80

Having finished your plan for 60-70 you can now repeat for 70-80. Lifestyle costs may fall during this time as you will probably travel and spend less.

Making things simpler to understand

At this point you might want to divide your investment portfolio into two Capital (for big expenses) and Lifestyle (to pay yourself a “pension” to cover lifestyle expenses). This clear division helps you understand your financial position as you drift into your dotage.

This is a simple model

This very simple model addresses the most important years of your retirement – the ones where you are still healthy enough to enjoy it. It helps you make sure that you don’t underspend and die rich. If you want to leave the wealth of a lifetime to the tax man and your children that’s fine but don’t do it by accident.

The simple model does not include inflation or taxes which increase your costs and investment growth that increases your savings.

Over a 10 year period inflation and growth typically differ by only 2 percent a year in our favour and so our simple model is good enough. If your investments are shielded from taxes in Pensions and ISAs then tax may not be a consideration.

The important thing to understand is that if

Investment income > Annual expenditure

Your savings will go up but if you spend more than you earn then your savings will go down but that’s OK. Our goal is not to die rich and some de-accumulation is to be expected and even welcomed because it shows that we are deciding how to spend our lifetime wealth not the taxman or our children.

A Better Model

If you are good at Excel you can create a model that allows for,

• Withdrawal sequencing (how much money you need in each year)
• Inflation
• Different investment growth rates (say 2%, 6%, 8%)
• Different capital requirements
• Inheritance tax planning

And Finally

This is a very simple model, its only purpose is to help you gain a basic understanding of your financial position when you are considering retirement.

If you are lucky you will find that you lifestyle is “over funded” and you can easily retire early and pursue your dreams. If your position is more marginal, your “house is my pension” or have complex family situations then you will need professional advice.

If you do need professional advice then the information that you will have collected to make this simple model will be of great help to your financial advisor.