The 4% Rule Explained

The 4% rule is a guideline for how much you can spend from a retirement portfolio: take 4% of its value in your first year, then give yourself that same amount adjusted for inflation every year after. It gets used two ways: as a spending limit once you are retired, and as a savings target before you get there.

It comes from William Bengen, a financial planner who published the work in the Journal of Financial Planning in 1994. He ran a fixed inflation-adjusted withdrawal against every 30-year period in US market history back to 1926, looking for the highest rate that survived all of them, including retirements beginning in 1929 and 1966. That rate came out a little above 4%. The Trinity Study, published in 1998 and frequently confused with Bengen’s paper, asked a similar question by a different method and landed in similar territory.

How the 4% Rule Works

You take 4% once, in year one. Each year after that you increase the previous year’s dollar amount by inflation and withdraw that, whatever the portfolio has done in the meantime.

A $1,000,000 portfolio produces $40,000 in the first year. With 3% inflation, year two is $41,200 rather than 4% of the new balance. If markets fell 20% in between, the withdrawal is still $41,200. Holding spending fixed in real terms through a downturn is the demanding part of the rule, and it is where the failures in Bengen’s testing came from.

The rule also assumes a particular portfolio. Bengen tested allocations of roughly 50% to 75% stocks with the rest in bonds. A portfolio held mostly in cash or bonds lacks the growth to sustain inflation-adjusted withdrawals across three decades, and the rule was never meant to describe one.

How to Calculate Your 4% Rule Number

Turned around, the rule gives you a savings target. Dividing annual spending by 4% is the same as multiplying it by 25:

Target portfolio = annual spending x 25

The figure you multiply is spending, not income. Withdrawals from a traditional account are taxable, so the portfolio has to produce enough to cover the tax as well as the spending. And the rate you pick compounds: moving from 4% to 3% raises every target by a third.

What the Rule Leaves Out

Bengen’s result was specific to the conditions he tested, and several of those do not describe a typical retirement.

The horizon was 30 years, which suits someone retiring at 65. Someone leaving work at 45 needs the money to last closer to 50, and success rates fall as the period lengthens. The data was US-only, drawn from a stretch when US markets outperformed most other developed markets; the same method applied elsewhere generally produces lower sustainable rates.

Spending was assumed flat in real terms, which is not how retirees behave. Actual spending tends to follow a retirement spending smile, higher early, lower through the middle years, rising again late with healthcare. Retirees also cut back on their own after bad markets, and testing that allows for those adjustments generally shows better outcomes than a rule that holds spending fixed.

Costs were excluded entirely. Bengen used gross returns, so a portfolio paying 1% in advisory and fund fees is effectively withdrawing 5%, not 4%. And nothing outside the portfolio appears in the calculation at all: Social Security, a pension, part-time income, and home equity all change what the portfolio has to do.

Underneath all of it sits sequence of returns risk. Two retirements with identical average returns end very differently depending on whether the poor years arrive early or late, because a fixed withdrawal during a decline sells more shares to fund the same spending.

Since the answer moves with your horizon, allocation, costs, and other income, no single percentage settles it. The alternative is to skip the rate: model the spending, income, and taxes you actually expect year by year, then run that plan through ProjectionLab’s Monte Carlo simulation to see how often it holds up.

Frequently Asked Questions

Does the 4% rule include Social Security? No, it describes portfolio withdrawals only. Subtract expected benefits from your spending and apply the rule to what is left. Someone spending $70,000 a year who expects $30,000 from Social Security needs the portfolio to cover $40,000, which puts the target at $1,000,000 rather than $1,750,000. That subtraction only works once benefits actually start, so retiring before you claim means funding the full $70,000 through the bridge years.

Is 4% still safe today? It remains a reasonable planning anchor, and Bengen himself revised the figure upward in later work after adding broader diversification. What the safe rate is for you depends on your horizon, allocation, fees, and how much you could cut spending after a bad year. That last one moves the answer more than the difference between 3.5% and 4%.

What if the market crashes right after I retire? That is the scenario the rule was built around, and in Bengen’s testing the 1929 and 1966 retirees survived it, though narrowly. The practical protection is flexibility: skipping a single inflation adjustment after a severe decline improves outcomes substantially, which is the idea behind guardrail strategies.

Should I use 4% if I retire early? Probably not without adjusting it. A 50-year retirement is a different problem from a 30-year one, and rates closer to 3% to 3.5% are common for very early retirement. Early retirees also usually keep more capacity to earn again, which offsets part of the added risk.