Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

When it comes to the seemingly complex world of investing, and arguably even trickier world of pensions and retirement planning, rules of thumb can be a really good way to cut through the jargon and get the gist of what might actually be useful to you.

Admittedly a very rough and ready way to plan for your future financial security, they don’t suit everyone and they certainly don’t suit every situation, so we’ve taken a look through five of the most popular to see which rules of thumb cut the mustard - and which would be better off consigned to the ‘popular misconception’ bin.

1. The rule of 72

The rule of 72 is a popular yardstick for estimating the length of time it will take an investment with a fixed annual interest rate to double in value.

To use it, you divide 72 by your expected annual rate of return to calculate roughly (very roughly) how many years it will take for your initial investment to double in value.

The first thing to note is that this rule of thumb relies on a fixed rate of interest, so if you want to see how long it will take £1,000 to double in value at 4% a year you need that 4% to last the distance. And in this specific case the distance needed is a pretty hefty 18 years.

Achieve a rate of 6% though and your investment would double in value in 12 years. While at 3% it would take 24 years to turn £1,000 into £2,000 and at 2% it would take an extremely long 36 years to get to the same point. As rough and ready as it is, it’s a very good way of demonstrating the significance of a one, or even a half, percentage point rise or fall.

2. 100 minus your age

The “100 minus your age” rule is designed to give you a rough guide as to how much of your investment portfolio should be in equities, such as equity funds or in individual stocks and shares, and fixed income investments, such as bonds.

To work it out, you subtract your age from 100 to get to a percentage split for your investments. The number you get equates to the percentage of your investments you should hold in equities, according to the 100 minus your age rule. The remainder should then, according to the rule, be held in fixed income investments, such as bonds. The point is to ensure you maintain a balanced portfolio and what it does is steer you away from higher-risk equities the closer you get to retirement.

You’ll sometimes see the rule lengthened to 110 or 120 to account for the fact that people are living longer lives. And herein lies the biggest issue with this particular, very broad, rule of thumb.

Taken at face value, this rule suggests a 50-year-old should have a 50/50 split, while anyone over the age of 60 will increasingly be pushed towards shifting the bulk of their investment portfolio into fixed income assets.

However, what it doesn’t do is take into account your personal goals or circumstances, or any of the economic factors or stock market factors that also play a big part in the relative attractiveness of these very different asset classes.

Take bonds. When interest rates go up, as they have been for a while now, bond prices go down. And conversely, when interest rates go down (as they may start to do later this year), bond prices go up. Make the switch into them at the wrong time, based purely on this rule of thumb, and the outcome could be detrimental to your long-term wealth.

And let’s not forget inflation. What is important to remember is that your money needs to last a potentially very long time in retirement. That’s why it’s essential that you factor in inflation too.

Prices always rise over time and £100 today will buy you far less in 20 or 30 years’ time. For example, if inflation is running at a rate of 2%, that car that would require you to fork out £25,000 to buy it today is going to need you to stump up £41,015 in 25 years' time. This is why when you’re investing for the longer term especially it’s essential that you try your best to invest in a way that aims to at least keep pace with inflation. Otherwise you could all too easily find yourself with rapidly diminishing purchasing power in a high inflation environment.

3. The 4% rule

The 4% rule suggests that retirees can comfortably withdraw 4% from their pension pot every year without risking running out of money.

As we’ve already mentioned, the longevity issue has become more prominent as we’re living longer in retirement. The money worry probably most likely to keep retirees and soon-to-be-retirees awake at night is that they’ll run out of pension cash long before they’ll die.

However, studies show that 4% annual withdrawals, updated each year to stay in line with inflation, will leave you very likely to see your money last for at least 30 years.1

In fact, ever since the so-called pension freedoms came in, allowing you to choose how you manage your pension pot in retirement, the 4% rule has proven to be a consistent rule of thumb.

Take someone with a £250,000 fund. Assuming they take £62,500 (25%) tax-free, that leaves the remaining £187,500 to generate a regular annual income of £7,500, based on a 4% withdrawal rate.

It’s worth remembering that, while income from drawdown appears lower than that from annuities, money in drawdown remains in your ownership and is available to use as you wish, including as inheritance to pass on after you die. Money used to buy an annuity is no longer yours, although some products will guarantee benefits are paid to loved ones after you die.

The 4% rule is also very cautious. Taking a higher percentage out of your pension pot every year does increase the risk of your money running out sooner, but only incrementally. For instance, the same study which showed 4% withdrawals being sustainable in 95% of cases, also showed that 5% withdrawals were equally as sustainable in 85% of cases.

Again though, the withdrawal rate that’s right for you will vary, so do take advice if you need to. Because the last thing any of us wants to do is run out of money in our dotage, after decades spent working and diligently paying into our pensions.

4. 10% of salary for retirement saving

The 10% salary rule attempts to tackle the thorny and complex issue of how much of our salary we should be regularly saving into our pension pots.

Conventional wisdom dictates that we should all be putting away roughly 10% of our annual gross income each year for future retirement expenses. That’s a good start, but for many of us it won’t be enough. And common sense suggests the percentage you need to be paying into a pension increases for each decade you delay.

The amount you personally need to be saving may, in truth, be far higher. After all, the 10% rule is a blanket rule of thumb which probably assumes you started paying in 10% of your salary as soon as you started working. If that was at the age of 18 then it may be enough, but if you don’t start paying into a pension until, say, the age of 30 you might need to start by paying in 15% or 20% a year, just to make up for lost time.

Since 2019 the minimum total contribution rates for automatic enrolment into a workplace pension have been fixed at 8%, so if you haven’t given another thought to your workplace pension until now, you might want to. Just check you’re saving enough to buy yourself even a moderately comfortable retirement.

And this is essential for women, in particular. Women typically have almost 38%2 less in their pensions than their male counterparts, because of factors such as career breaks, part-time working and generally lower salaries.

Based on the Office for National Statistics’ average earnings figures and adjusting for inflation and investment growth, the average pot at retirement for a woman paying in the minimum 8% into her workplace pension over 40 years without a career break is £306,377, compared to £453,616 for men. For women who choose or need to take career breaks to raise children or care for older relatives, this gap in retirement funds widens further.

But Fidelity research has shown that increasing your workplace pension contributions by as little as 1% could give you as much as £37,000 more in retirement. And that’s possible even if you end up taking a career break at some point, for example to start a family or care for an elderly relative.

5. 3-6 months’ expenses

First things first, any amount you save into an emergency fund is better than nothing. But, if you’re looking to create a cash cushion to sustain you in the event of an unexpected expense or maybe a period of unemployment, common sense says at least three and ideally six months’ worth of living expenses is really what you need to have put aside.

Stashed into a cash account, so you have easy access should you need the money in a hurry, this cash buffer will also grow nicely in a high interest account or cash ISA.

Without an emergency fund the risk is that you could be forced to rely on credit cards, an expensive loan or, if you’re already drawing from your pension, dip into that more than you had planned. None of these are ideal and could have a seriously detrimental impact on your long-term financial security.

If you are single, self-employed or work in a job or industry that has unstable employment, it may be beneficial to have more like 12 to 18 months’ worth of living expenses saved.

And, as mentioned above, don’t think that if you’re already retired this rule of thumb doesn’t apply to you. It does. You also need an emergency fund, otherwise you could end up dipping into your pension pot more than planned and jeopardise your longer-term financial security. You also don’t want to be forced to sell assets when market conditions are less than favourable.

All of these rules of thumb have their pros and cons. Some will be more useful to you than others. Some you may already be very familiar with. Just remember that none of us invests in a bubble. That is why it’s important to keep one eye on everything that’s going on and adjust your investments as and when needed - at the same time as keeping your own personal circumstances and goals front and centre of your overall wealth and retirement planning. That way you will be best placed to take advantage of the prevailing circumstances, factor in your own personal needs and goals and get your money working hardest for you.


1 American Association of Individual Investors (AAII) Journal, February 1998, 24 April 2024

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in a SIPP and tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). It's important to understand that pension transfers are a complex area and may not be suitable for everyone. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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