The 4% Rule Explained With Real Numbers
The 4% rule is the most quoted number in retirement planning. It says you can take 4% of your savings in the first year of retirement, raise that amount with inflation every year after, and have a very good chance of your money lasting at least 30 years. It is simple enough to work out on a napkin, which is a big part of its appeal, but it rests on a few assumptions that are worth understanding before you build a plan on it.
Where the rule came from
In 1994, financial planner William Bengen tested how much retirees could have withdrawn each year from a portfolio of US stocks and bonds in every 30-year period since 1926. He found that a first-year withdrawal of about 4%, adjusted for inflation afterwards, never ran out within 30 years, even for people who retired just before the worst markets in history. Four years later, three professors at Trinity University ran a similar study, which became known as the Trinity study, and reached much the same conclusion for portfolios with at least half in stocks.
Since then the rule has been tested, criticized and updated many times. Bengen himself has argued in later work that a slightly higher starting rate held up once more asset classes were included. Other researchers have warned that lower expected returns could make 4% too aggressive. The number has survived all of this mainly as a reasonable middle point.
How it works, year by year
Suppose you retire with $1,000,000. In year one you withdraw 4%, which is $40,000. If inflation that year is 3%, in year two you withdraw $41,200 regardless of what the market did. In year three, after another 3% of inflation, you take about $42,440, and so on.
Notice that after the first year the rule does not look at your balance at all. It keeps your spending power steady and lets the portfolio absorb the ups and downs. That is what makes it safe in bad markets, and also why it often leaves people with more money than they started with when markets are kind.
What 4% means for your target
Flipping the rule around gives the most useful number in early retirement planning. If 4% of your savings should cover a year of spending, then you need 25 times your yearly spending saved.
| Yearly spending from savings | Savings needed at 4% | At 3.5% | At 3% |
|---|---|---|---|
| $30,000 | $750,000 | $857,000 | $1,000,000 |
| $40,000 | $1,000,000 | $1,143,000 | $1,333,000 |
| $60,000 | $1,500,000 | $1,714,000 | $2,000,000 |
| $80,000 | $2,000,000 | $2,286,000 | $2,667,000 |
The FIRE number calculator works this out from your own budget, and lets you subtract a pension or Social Security first.
The assumptions behind the rule
The rule was built for a 30-year retirement. If you retire at 40 and need the money to last 50 years or more, most research suggests a starting rate of 3.25% to 3.5% instead. It also assumes a portfolio of roughly half to three-quarters stocks. A very cautious portfolio of mostly bonds and cash historically could not support 4%, because it did not grow fast enough to keep up with inflation.
Fees matter too. The studies used market returns with no fees taken out. If you pay 1% a year to an adviser or for expensive funds, that 1% comes straight out of what you can safely withdraw. And the rule says nothing about taxes: a $40,000 withdrawal from a traditional 401(k) is taxable income, so your spending money will be less.
Sequence risk: the real danger
The biggest threat to a retirement portfolio is not a low average return but bad returns early on. If the market falls 30% in your first two years while you keep withdrawing, you sell more shares at low prices and the portfolio may never recover. The same fall twenty years in barely matters. This is called sequence-of-returns risk, and it is the reason the 4% figure is set by the worst historical starting years rather than the average.
People handle it in a few ways. Some keep one or two years of spending in cash so they do not have to sell stocks in a crash. Others use flexible rules, such as skipping the inflation raise after a losing year or cutting spending by 10% when the portfolio drops sharply. Research suggests even small cuts in bad years make a much higher starting rate safe.
Is 4% too high or too low?
For a traditional retirement at 65 with Social Security covering part of your spending, 4% is a sensible planning figure and arguably a little cautious. For an early retirement of 40 years or more, 3.5% gives a better margin. If you are willing to cut back in bad years, 4.5% or even 5% can work.
The withdrawal rate calculator shows what different rates mean in dollars, and the money last calculator shows how long a given balance survives at your spending level. Both are illustrations rather than guarantees, since future returns may look nothing like the past, and nothing here is personal financial advice.
Run your own numbers
This guide is general information for planning, not personal financial advice. Figures were checked on the date shown and can change.