What is the 4% rule?

Where the number comes from

In 1994 the financial planner William Bengen asked a simple question: if a retiree takes a fixed share of their portfolio in the first year, then raises the dollar amount with inflation every year after, what is the highest starting share that never ran out over 30 years of real US market history? He tested every retirement start year from 1926 with a mix of stocks and bonds. The answer was about 4%. Even someone who retired just before the worst stretches of the twentieth century would have had money left after 30 years.

Four years later, three professors at Trinity University ran a similar study (Cooley, Hubbard and Walz, 1998) with different portfolio mixes and lengths, and reached a similar conclusion for stock-heavy portfolios over 30 years. Together the two studies became the "4% rule".

Two words in that history matter more than the number: past and 30 years. The rule describes what happened in US markets over three-decade retirements. It is not a promise about future returns, and it was not built for a retirement that starts at 40 and has to last 50 years.

What it looks like with numbers

The rule has two parts: the first-year withdrawal is a share of the portfolio, and after that the amount rises with prices, not with markets. Here is a worked example, run by the same engine as the safe withdrawal rate calculator.

From a portfolio of $1,000,000, a 4.0% rate means a first-year withdrawal of $40,000. With a steady 7.0% return and 3.0% inflation every year, the money lasts all 30 years: yes.

Why a steady return flatters every rate

The card above also shows the highest withdrawal rate that would last 30 years if returns arrived as a smooth average: 5.5%. That is well above 4%, which raises an obvious question: if the average return supports far more, why did history only support about 4%?

The answer is that returns do not arrive smoothly. In retirement you are selling every year. When the market falls early, you sell more shares to raise the same income, and those shares are not there when prices recover. Two retirements with the same average return can end very differently depending on the order of the good and bad years. This is sequence of returns risk, and it is why the 4% figure sits far below what an average would suggest. The gap between the smooth-average answer and the historical answer is the price of not knowing the order in advance.

You can see the effect directly in the sequence of returns calculator, and test your own plan against thousands of possible orderings in the Monte Carlo simulator.

A longer retirement needs a lower rate

The same steady-return model shows how length alone changes the answer.

Over 50 years the highest steady rate falls to 4.4%, compared with 5.5% over 30 years. History behaves the same way, only more harshly: the longer the money has to last, the more bad sequences it has to survive. This is why many people planning to stop work in their forties set their plan at 3.5% or lower rather than 4%, and why the FIRE calculator lets you choose the rate rather than fixing it.

What the rule assumes

• You raise withdrawals with inflation, and nothing else. No cutting back in a bad year, no extra spending in a good one. Real retirees usually adjust, and flexible spending can support a higher starting rate. Rigid spending is the cautious case.
• A stock-heavy portfolio. Bengen's and the Trinity results favoured portfolios with half or more in stocks. A mostly-cash or mostly-bond portfolio supported less.
• Fees and taxes are not counted. A 1% yearly fee comes straight off the return the rule relied on, and withdrawals from traditional accounts are taxed as income. The investment fee calculator shows what fees cost over decades.
• US history repeats in a useful way. Other countries' markets supported lower rates over the same periods, so the US result is a fortunate sample, not a law.

How to use it well

Treat 4% as a reference point, not a target. Use it to size the portfolio you need, then test the result against the things the rule leaves out: a longer retirement, a weaker sequence of returns, fees, taxes, and health costs before Medicare. The rate you choose is the trade-off between a smaller target reached sooner and a bigger margin for the years you cannot predict.