The Four-Percent Rule

The four-percent rule is a retirement planning guideline: in your first year of retirement, withdraw 4% of your portfolio. In subsequent years, withdraw the same amount adjusted for inflation. This rule (based on historical analysis) has a high success rate of not running out of money over a 30-year retirement.

The math

The rule is simple: if your portfolio is $1,000,000, withdraw $40,000 in year 1 (4%). If inflation is 3%, withdraw $41,200 in year 2. Continue indefinitely.

The rule assumes:

• You are retiring at age 65 and live to 95 (30-year retirement).
• Your portfolio is 60% stocks and 40% bonds.
• You adjust withdrawals for inflation annually.
• You rebalance your portfolio periodically.

Where the rule comes from

In the 1990s, financial planner William Bengen analyzed historical data from 1926–1976 to find the withdrawal rate that would sustain a 30-year retirement with high probability. He found that a 4% initial withdrawal rate (adjusted for inflation) succeeded in 95% of historical scenarios.

Later research refined this, showing 4% works well for typical scenarios but has edge cases (long retirements, late-career market crashes, very long life expectancies).

Why 4% works

Sequence of returns. The biggest risk in retirement is sequence of returns — if markets crash early, you sell stocks at low prices and your portfolio never recovers. The 4% rule provides a cushion: in bad years, your portfolio shrinks, but in good years, it rebounds and grows.

Historical stock returns. US stocks have returned ~10% annually (nominal) over the long term, with inflation of ~3%. Real (inflation-adjusted) returns are ~7%. Bonds return ~5–6% nominally. A 60/40 portfolio has blended returns of ~7–8%, allowing 4% withdrawal and portfolio growth (or stability) through market cycles.

Limitations and criticisms

Very long retirements. If you retire at 50 and live to 100 (50-year retirement), 4% may not be safe. You might need 3–3.5%.

Low current returns. If stock and bond yields are lower than historical averages (current dividend yields on stocks are ~2%, bond yields ~4–5%), 4% may not be sustainable.

Market timing. Bad timing (retiring right before a crash) is risky. If you retire at the start of a bear market, your portfolio may not recover quickly enough, even at 4% withdrawal.

Inflation volatility. The rule assumes inflation is modest and predictable. High or volatile inflation (e.g., 2021–2023) can erode purchasing power faster than the rule accounts for.

Variants and refinements

Safe withdrawal rate (SWR): A personalized version that factors in your specific situation (retirement length, portfolio composition, goals, risk tolerance). Might be 3.5%, 4%, or 4.5%.

Dynamic withdrawal. Instead of a fixed 4% plus inflation, adjust your withdrawal based on portfolio performance. In strong years, spend more; in weak years, spend less. This requires flexibility but improves sustainability.

Guardrails approach. If your portfolio grows beyond a certain threshold or shrinks below another, adjust your spending. For example, if your portfolio grows 20% above target, increase spending; if it falls 20% below, decrease spending.

Planning with the four-percent rule

Calculate required portfolio: If you spend $50,000/year, you need $1.25M ($50,000 × 25 = inverse of 4%).

Test your plan: Run a Monte Carlo simulation (many financial planning software tools do this) to see your success rate under different market scenarios.

Monitor and adjust: Every few years, recalculate. If your portfolio has grown significantly, you might increase spending. If it has shrunk, you might decrease spending or work longer.

Interaction with Social Security

The four-percent rule often assumes investment portfolio withdrawals are your primary income. If you also receive Social Security (e.g., $1,500/month = $18,000/year), you can withdraw less from your portfolio or have higher spending.

This is why planning with Social Security timing is important — claiming at 62 vs. 70 changes your dependency on portfolio withdrawals.

See also