What interest rate should you use when planning for retirement?
It’s certainly not the flashiest of questions, nor is it the most riveting, but it just might be one of the most important.
That single percentage decimal could entirely shape how much you’ll need to save, how long your pension will last, and whether or not you’ll be kicking your feet up without a worry in the world, or quietly watching your spending in case the numbers don’t stretch.
Already covered the basics of choosing a growth rate? This article builds on that foundation with 2025-specific figures, planning examples, and modelling tips.
Choosing a Suitable Interest Rate
When you’re building a retirement plan, the interest rate (also called your “assumed rate of return”) is the engine behind your projections. It represents the expected growth of your investments, usually shown as an annualised nominal percentage, i.e. before inflation and fees.
Pick a rate that’s too high, and you risk running out of money earlier than planned. Too low, and you might over-save, or limit your lifestyle unnecessarily.
So, what’s realistic in today’s climate?
Here’s a rough guide, based on recent forward-looking data from Vanguard and current interest rates as of September 2025:
- Cash & Short-term Bonds (low risk): Nominal returns of 4-5%. Bank of England base rate is currently 4.0%, and top easy-access savings accounts offer 4.4–4.8% AER.
- UK Gilts & Investment Grade Bonds: Forward returns are estimated at 4.3–5.3% annually.
- Balanced Portfolios (60/40): Expect nominal returns in the 5–6% range, with real returns (after 2% inflation target) closer to 3–4%.
- Global Equity-Heavy Portfolios: Nominal expected returns of 5–7% (after fees, closer to 4–6%).
If you want a conservative real return (after inflation and charges), many advisers and regulators suggest assuming 2–4%, depending on your mix and risk appetite.
How Interest Rates Impact Retirement Plans
It’s hard to overstate how much your chosen interest rate changes the picture.
Let’s say you want to build a £500,000 retirement pot over 30 years. Here’s how much you’d need to contribute monthly (assuming end-of-month contributions and monthly compounding):
- 3% return: £858/month
- 4% return: £720/month
- 5% return: £601/month
- 6% return: £498/month
- 7% return: £410/month
The difference between 4% and 6%? Over £220 a month. That’s the power of compounding! It’s why a small tweak to your return assumption can make a big difference to your savings goal.
But remember: higher returns, like all good things, come with higher risk. It’s tempting to plug in 7% and call it a day, but your plan is only as good as its weakest assumption. If your investments underperform, the shortfall could land right when you need the income most.
How to Adjust for Changing Rates
Market conditions shift. Inflation rises and falls. Interest rates get cut, then raised again. Your retirement assumptions should move with the times.
In lower-return environments, you may need to:
- Save more each month
- Retire slightly later
- Spend less initially
- Or a mix of all three
Diversifying your portfolio, across equities, bonds and cash can help reduce volatility and smooth long-term results. Many advisers also run Monte Carlo simulations, which test how your plan holds up across thousands of market scenarios.
If you’re already retired, you might use strategies to manage sequence risk: the danger of poor returns early in retirement.
One well-known method is the “bucket strategy”, which segments your assets into short, medium and long-term pots. This approach helps avoid selling investments at a loss when markets dip. That said, it’s just one option, and not right for everyone, so it’s best considered alongside other withdrawal plans.
Tools for Interest Rate Calculations
You don’t need a maths degree or spreadsheet wizardry to test retirement scenarios.
There are several online calculators that allow you to:
- Set your interest rate assumption
- Adjust for inflation
- Compare drawdown vs annuity options
- Test best- and worst-case outcomes
If you’re working with a financial adviser, they’ll often use cashflow modelling tools that incorporate:
- Personal tax rates
- Pension rules
- State Pension timing
- Life expectancy modelling
- Investment volatility assumptions
Be sure to ask:
- What rate of return is being used in this forecast?
- Is that rate nominal or real?
- How would the outcome change if the rate was 1–2% lower?
A good adviser won’t mind those questions, they’ll welcome them with open arms!
How IFP Can Help
Choosing the right interest rate for retirement planning isn’t just about picking a number, it’s about understanding what it means for your future lifestyle, your risk comfort, and your long-term goals.
At Informed Financial Planning, guesswork isn’t part of our vocabulary!
Our Chartered advisers use detailed, evidence-backed cashflow modelling to explore multiple scenarios, including varying return rates, inflation outcomes, and market sequences. You’ll see what your retirement looks like under different conditions, and how we can build in flexibility to adapt as life unfolds.
We also keep a close eye on economic trends, tax rules, and investment performance, so your plan stays relevant and responsive over time. Whether you’re five years away from retirement or already drawing down, we’re here to help you plan it all with clarity and confidence.
Conclusion
So, what interest rate should you use for retirement planning?
There’s no magic number. But by choosing a rate that reflects your investment strategy, adjusting for inflation, and revisiting your plan regularly, you’ll avoid unrealistic expectations and give yourself the best shot at a secure, enjoyable retirement.
Need help sense-checking your assumptions or building a plan that’s truly tailored to you?Let’s talk, the first step could make all the difference!
