The 4% rule is a retirement guideline that suggests you can withdraw 4% of your portfolio in the first year of retirement, then adjust that amount for inflation each subsequent year, with a high probability of your money lasting at least 30 years.
If you have $1 million saved, the 4% rule suggests you can spend $40,000 in year one, then $41,200 in year two (assuming 3% inflation), and so on—with confidence your savings will sustain you.
This guide explains how the 4% rule works, where it came from, and how to use it in your retirement planning.
The Origins of the 4% Rule: The Trinity Study
The 4% rule emerged from research by three professors at Trinity University in 1998, commonly called the Trinity Study. They analyzed historical market data from 1926-1995 to determine sustainable withdrawal rates.
Key Findings
The researchers tested various withdrawal rates and portfolio allocations against actual market performance:
| Withdrawal Rate | Portfolio Success Rate (30 years) |
|---|---|
| 3% | 100% |
| 4% | 95-98% |
| 5% | 85-90% |
| 6% | 70-75% |
A 4% withdrawal rate, combined with a portfolio of 50-75% stocks, succeeded in approximately 95% of 30-year historical periods—meaning your money would have lasted through the Great Depression, multiple recessions, and various market crashes.
What “Success” Means
In this context, success means not running out of money over a 30-year retirement. In most successful scenarios, retirees actually ended up with more money than they started with, due to compound interest and market growth exceeding withdrawals.
How the 4% Rule Works in Practice
Step 1: Calculate Your First-Year Withdrawal
Formula: Portfolio value × 4% = Year 1 withdrawal
| Retirement Savings | 4% Withdrawal |
|---|---|
| $500,000 | $20,000 |
| $750,000 | $30,000 |
| $1,000,000 | $40,000 |
| $1,500,000 | $60,000 |
| $2,000,000 | $80,000 |
Step 2: Adjust for Inflation Each Year
After year one, increase your withdrawal by inflation (typically 2-3%):
Example with $1 million portfolio:
| Year | Withdrawal (3% inflation adjustment) |
|---|---|
| 1 | $40,000 |
| 2 | $41,200 |
| 3 | $42,436 |
| 5 | $45,023 |
| 10 | $52,191 |
| 20 | $70,128 |
Notice: You adjust based on inflation, not portfolio performance. If markets drop 20%, you still take your inflation-adjusted amount.
Step 3: Maintain Your Portfolio
The 4% rule assumes a balanced portfolio. Common allocations:
- 60% stocks / 40% bonds (moderate)
- 75% stocks / 25% bonds (growth-oriented)
- 50% stocks / 50% bonds (conservative)
All allocations showed high success rates in the original study. For the stock portion, low-cost index funds are the most efficient choice.
Calculating Your Retirement Number
The 4% rule provides a simple formula to calculate how much you need to retire:
Retirement Number = Annual Expenses × 25
This is the inverse of 4% (100 ÷ 4 = 25).
Example Calculations
| Annual Expenses | Retirement Number (25x) |
|---|---|
| $30,000 | $750,000 |
| $40,000 | $1,000,000 |
| $50,000 | $1,250,000 |
| $60,000 | $1,500,000 |
| $80,000 | $2,000,000 |
If you need $50,000 per year in retirement, you need $1.25 million saved.
Don’t Forget Other Income
Your retirement expenses minus other income sources = what your portfolio needs to cover.
Example:
- Annual expenses: $60,000
- Social Security: $24,000
- Pension: $12,000
- Portfolio needs to cover: $24,000
- Retirement number: $24,000 × 25 = $600,000
Social Security and pensions significantly reduce how much you need saved.
Criticisms of the 4% Rule
The 4% rule is useful but not perfect. Consider these critiques:
1. Based on Historical US Data
The Trinity Study used US market returns from a period when America dominated global growth. Future returns may differ. Other countries’ markets haven’t performed as well historically.
2. Uses a Fixed 30-Year Period
If you retire at 40, you need 50+ years of income—well beyond the studied timeframe. Early retirees often use 3-3.5% withdrawal rates.
3. Doesn’t Account for Sequence of Returns Risk
If markets crash early in your retirement, you’re withdrawing from a depleted portfolio. This “sequence of returns risk” can doom a portfolio even if average returns are good.
Example of sequence risk:
Two retirees each average 7% returns over 20 years, but:
- Retiree A gets good returns first, then bad
- Retiree B gets bad returns first, then good
Retiree B may run out of money while Retiree A thrives—same average return, different order.
4. Ignores Spending Flexibility
Real retirees don’t spend the same amount regardless of market conditions. Most can (and should) reduce spending temporarily during downturns.
5. Current Bond Yields Are Lower
When the Trinity Study was conducted, bonds yielded 5-7%. Today’s yields are lower, potentially reducing safe withdrawal rates.
Alternatives and Modifications to the 4% Rule
The 3% Rule (Conservative)
For early retirees or those wanting extra safety margin:
- Withdrawal rate: 3%
- Retirement number: Expenses × 33
- $50,000 expenses = $1,650,000 needed
The Variable Percentage Withdrawal
Adjust your withdrawal rate based on portfolio performance:
- Good year (+15%): Withdraw 5%
- Average year (+7%): Withdraw 4%
- Bad year (-10%): Withdraw 3%
This extends portfolio longevity but requires flexible spending.
The Guardrails Approach
Set upper and lower limits:
- If withdrawal rate drops below 3.5%, increase spending
- If withdrawal rate rises above 5%, decrease spending
This prevents both over-saving and over-spending.
The Bucket Strategy
Divide your portfolio:
- Bucket 1 (1-2 years): Cash and short-term bonds
- Bucket 2 (3-10 years): Bonds and conservative investments
- Bucket 3 (10+ years): Stocks for growth
Withdraw from Bucket 1, refill from Bucket 2, let Bucket 3 grow.
Using the 4% Rule for FIRE
The Financial Independence, Retire Early (FIRE) community widely uses the 4% rule—with modifications.
FIRE Adjustments
Early retirees often:
- Use 3.5% or 3% for longer retirements
- Plan for some earned income (part-time work, side projects)—this is essentially Coast FIRE
- Maintain flexible spending that can decrease in downturns
- Start with a higher rate, planning to reduce when Social Security begins
The “4% Plus” Approach
Many FIRE adherents plan for:
- 4% withdrawal from investments
- Plus Social Security at 62-70 (bonus income)
- Plus part-time income if desired (flexibility)
This makes 4% more sustainable for 40-50 year retirements.
How to Apply the 4% Rule to Your Planning
Step 1: Estimate Your Retirement Expenses
Calculate what you’ll actually spend, not your current salary:
- Housing (may be lower if mortgage is paid)
- Healthcare (often higher in retirement)
- Food and daily living
- Travel and hobbies
- Taxes
Step 2: Subtract Guaranteed Income
- Social Security (estimate at ssa.gov)
- Pensions
- Annuities
- Part-time work income
Step 3: Calculate Your Number
(Retirement expenses - Guaranteed income) × 25 = Your retirement savings target
Step 4: Track Your Progress
FI Ratio: Current savings ÷ Retirement number = % to financial independence
If you need $1 million and have $400,000, you’re 40% of the way there.
Frequently Asked Questions
Is 4% still a safe withdrawal rate?
Many financial advisors now recommend 3.3-3.5% for greater safety, especially given current bond yields and potential for lower future stock returns. However, 4% remains a reasonable guideline for traditional 30-year retirements.
Does the 4% rule include Social Security?
No. The 4% rule applies to your invested portfolio. Social Security is additional income that reduces how much you need to withdraw from savings.
Can I withdraw more than 4% if I’m flexible?
Yes. If you can reduce spending during market downturns, you might safely use 5% initially. The key is flexibility—if markets drop, you spend less.
What if I need more than 4% of my savings?
Options include:
- Delay retirement to save more
- Plan for part-time work in retirement
- Reduce planned expenses
- Accept higher risk of running out of money
How does the 4% rule handle inflation?
You increase withdrawals by inflation each year. If inflation is 3%, your year-two withdrawal is 3% higher than year one, maintaining purchasing power.
What about taxes?
The 4% calculation typically refers to pre-tax amounts. For tax-efficient planning, consider a mix of Traditional (tax-deferred), Roth (tax-free), and taxable accounts.
Key Takeaways
The 4% rule provides a useful retirement planning framework:
- Withdraw 4% in year one, then adjust for inflation
- Multiply annual expenses by 25 to find your retirement number
- Based on historical data showing 95%+ success rate over 30 years
- Not perfect—consider adjustments for early retirement or conservative planning
- Flexibility helps—ability to reduce spending during downturns increases success
- Other income counts—Social Security and pensions reduce required savings
Your Next Steps
- Calculate your expected annual retirement expenses
- Estimate Social Security benefits at ssa.gov
- Determine how much your portfolio needs to provide
- Multiply that amount by 25 for your target
- Calculate your FI ratio (current savings ÷ target)
- Set a monthly savings goal to reach your number
- Consider whether 4% or 3.5% fits your risk tolerance
The 4% rule isn’t a guarantee, but it’s one of the most studied and useful guidelines for retirement planning. Use it as a starting point, then adjust based on your circumstances and comfort level.
Written by Usman Saadat. Fact-checked by Maira Azhar.