The 4% Rule: How Much Can You Safely Withdraw in Retirement?

How much money can you take from your investment portfolio each year without running out? This is arguably the most important question in retirement planning, and the "4% rule" is the most well-known answer.

Here's what the 4% rule says, where it comes from, whether it still holds up, and how to use it in your own planning.

What Is the 4% Rule?

The 4% rule states that you can withdraw 4% of your retirement portfolio in the first year of retirement, then adjust that amount for inflation each subsequent year, and your portfolio should last at least 30 years with high probability.

Simple example:

• Portfolio at retirement: $1,000,000
• Year 1 withdrawal: $40,000 (4% of $1,000,000)
• Year 2 withdrawal (if inflation = 3%): $41,200 ($40,000 × 1.03)
• Year 3 withdrawal (if inflation = 3%): $42,436
• ...and so on, adjusting annually for inflation

The rule flips this around to define how much you need to save: if you need $40,000/year to live, you need $1,000,000 in your portfolio ($40,000 ÷ 0.04 = $1,000,000).

This is called the 25x rule — save 25 times your annual expenses to be retirement-ready.

Where Did the 4% Rule Come From?

The rule originated from a 1994 study by financial advisor William Bengen, who analyzed historical market data going back to 1926.

Bengen tested portfolios of 50-75% stocks and 25-50% bonds against every 30-year retirement period in US history. He asked: what's the highest withdrawal rate that would have allowed a portfolio to survive every 30-year period without running out of money?

The answer was 4% (or slightly above). No retiree who started with a balanced portfolio and withdrew 4% annually — adjusted for inflation — would have run out of money in any 30-year window of US market history, including retiring in 1929 (right before the Great Depression) or 1968 (entering a decade of stagflation).

A follow-up study by the "Trinity Study" (1998) confirmed these findings using more rigorous analysis and portfolio variations.

The 4% Rule in Practice

Step 1: Estimate your annual retirement spending

Add up what you expect to spend each year in retirement: housing, food, healthcare, transportation, travel, hobbies, etc. Be honest — most people underestimate retirement spending, especially healthcare.

Step 2: Apply the 25x multiplier

Annual spending × 25 = target portfolio size

• $30,000/year needed → $750,000 required
• $50,000/year needed → $1,250,000 required
• $80,000/year needed → $2,000,000 required
• $100,000/year needed → $2,500,000 required

Step 3: Account for other income

If you'll receive Social Security, a pension, or rental income, subtract that from your spending need first.

If you'll receive $20,000/year from Social Security and need $60,000/year total, you only need $40,000/year from your portfolio. That requires $1,000,000 in investments, not $1,500,000.

Is the 4% Rule Still Valid?

The original research was based on historical US market data and assumed:

• A 30-year retirement
• A 50/50 or 60/40 stocks/bonds portfolio
• Inflation-adjusted withdrawals

Several factors cause financial advisors to debate whether 4% is still appropriate today.

Arguments for Going Below 4% (3-3.5%)

Lower expected bond returns: When Bengen published his research, bonds yielded 6-8%. Today, with yields lower, the bond portion of a portfolio may not provide the same buffer it historically did.

Longer retirements: If you retire at 55 or 60, you might need your portfolio to last 40+ years, not 30. The 4% rule wasn't tested for 40-year retirements. A 3-3.5% withdrawal rate has held up better for longer time horizons.

Sequence of returns risk: If you retire just before a major market crash, your portfolio could be permanently impaired by taking large withdrawals during the down period. This risk is real if you retire in a highly valued market.

Arguments for 4% or Higher

Flexibility in spending: The original research assumed rigid, inflation-adjusted withdrawals even in bad market years. Most retirees reduce spending somewhat when markets are down. Adding spending flexibility dramatically improves portfolio survival rates — even withdrawal rates of 4.5-5% work when you can cut back 10-15% in bad years.

Shorter time horizons: For someone retiring at 65-70 with modest life expectancy, a higher withdrawal rate is appropriate.

Social Security as a backstop: Once you start Social Security (which you can take as late as 70 for maximum benefit), that covers baseline expenses regardless of market performance, making a higher portfolio withdrawal rate more sustainable.

Practical consensus: Most retirement researchers today suggest 3.5-4% as a reasonable starting point, with flexibility to adjust based on market conditions.

Limitations and Nuances

It's based on US market history. The US stock market has been the best-performing major market of the 20th century. This might not continue. Including international stocks in your portfolio and using slightly more conservative withdrawal rates hedges against US-specific underperformance.

It doesn't account for major expenses. Healthcare in retirement can be significant. Long-term care, if needed, can cost $50,000-100,000/year. Factor in potential healthcare costs beyond routine expenses.

It's a guideline, not a guarantee. The 4% rule had a small failure rate even historically — about 5% of scenarios. "Historically never failed" and "guaranteed" are not the same thing.

Your spending is not constant. Many retirees spend more in "go-go" early retirement years (travel, activities) and less in later years. This variation isn't captured in the simple 4% rule.

How to Use the 4% Rule in Planning

Use it as a planning target, not a rigid rule. The 25x multiplier gives you a solid portfolio target for retirement savings. Aim for it.

Build in flexibility. Plan to cut spending by 10-15% if your portfolio drops significantly in early retirement. This dramatically reduces failure risk.

Maintain a cash reserve. Keeping 1-2 years of expenses in cash allows you to avoid selling investments during a market downturn. This "bucket strategy" protects against sequence of returns risk.

Revisit annually. Check your portfolio value and withdrawal rate each year. If you've withdrawn more than 4% due to market drops, consider reducing spending or picking up part-time income temporarily.

Consider delaying Social Security. Waiting until 70 to claim Social Security increases your monthly benefit by 8% per year compared to claiming at 62. The guaranteed inflation-adjusted income from maximizing Social Security reduces your dependence on portfolio withdrawals.

Quick Reference: Portfolio Size by Annual Spending

Subtract Social Security and pension income from your spending need before calculating.

The Bottom Line

The 4% rule is the most battle-tested withdrawal guideline in retirement planning. It's not perfect — no financial plan is — but for a 30-year retirement with a balanced stock/bond portfolio and some spending flexibility, it's a reasonable starting point.

Save 25 times your annual spending. Keep fees low. Maintain spending flexibility. Delay Social Security. These four things, more than any sophisticated withdrawal strategy, will determine whether your money outlasts you.

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