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

The 4% rule is the most widely used retirement withdrawal guideline: withdraw 4% of your portfolio in year one, then adjust that dollar amount for inflation each year. Historically, this approach would have sustained a portfolio for at least 30 years in virtually every market scenario.

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How the 4% Rule Works

Year 1: Withdraw 4% of your total portfolio
Year 2+: Adjust the previous year's withdrawal for inflation
Portfolio: Invested in roughly 50/50 stocks and bonds

Example: $1,000,000 Portfolio

Year	Withdrawal	Inflation Adjustment	Remaining Portfolio (est.)
1	$40,000	—	$980,000
2	$41,200	+3%	$967,000
3	$42,436	+3%	$955,000
5	$45,050	+3%/year	$935,000
10	$52,200	+3%/year	$920,000
20	$70,150	+3%/year	$850,000
30	$94,300	+3%/year	$500,000+

The portfolio often ends with more than you started with, because market returns historically average 7-10% while you're withdrawing only 4% (adjusted).

How Much Do You Need? (Reverse 4% Rule)

Multiply your desired annual retirement income (from savings) by 25:

Annual Income Needed	Portfolio Required
$20,000	$500,000
$30,000	$750,000
$40,000	$1,000,000
$50,000	$1,250,000
$60,000	$1,500,000
$80,000	$2,000,000
$100,000	$2,500,000

Remember: this is the amount your portfolio needs to cover after Social Security, pensions, and other income sources.

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The History Behind the 4% Rule

Financial planner William Bengen published the original research in 1994. He tested every 30-year retirement period from 1926 onwards and found that a 4% initial withdrawal rate (adjusted for inflation) never depleted a 50/50 portfolio within 30 years — even through the Great Depression, 1970s stagflation, and major market crashes.

The Trinity Study (1998) from Trinity University expanded the research and confirmed similar results, giving the rule academic backing.

Limitations of the 4% Rule

1. It Assumes 30 Years

The rule targets a 30-year retirement. If you retire at 55 and live to 95, that's 40 years — and 4% may be too aggressive. Early retirees might consider 3.5% or lower.

2. Based on U.S. Historical Returns

U.S. stocks have had among the best historical returns globally. Future returns may be lower, especially with current high valuations.

3. Ignores Spending Flexibility

The rule assumes you'll spend the same (inflation-adjusted) amount every year. In reality, most retirees spend more early (travel, activities) and less later, with a spike for healthcare near the end.

4. One-Size-Fits-All

It doesn't account for:

Tax bracket differences (pre-tax vs Roth withdrawals)
Social Security timing
Pension income
Part-time work in early retirement
Healthcare costs before Medicare (age 65)

5. Sequence of Returns Risk

If the market crashes early in your retirement, the 4% rule is at higher risk of failure. A 30% drop in year 1 is far more damaging than a 30% drop in year 20.

Modern Alternatives

The 3.3% Rule (Updated Research)

Some researchers, including Morningstar, suggest that given current bond yields and stock valuations, a safer starting rate might be 3.3-3.5% for a 30-year retirement with 90% confidence.

The Guardrails Approach

Instead of a fixed percentage, set upper and lower guardrails:

Baseline: 4% initial withdrawal
Upper guardrail: If portfolio grows 20%+ above target, increase spending by 10%
Lower guardrail: If portfolio drops 20%+ below target, cut spending by 10%

This dynamic approach has a higher success rate because you adjust to market conditions.

The Bucket Strategy

Divide your portfolio into three buckets:

Bucket	Allocation	Purpose	Horizon
1 — Cash	1-2 years of spending	Immediate expenses	0-2 years
2 — Bonds	3-5 years of spending	Near-term stability	2-7 years
3 — Stocks	Everything else	Long-term growth	7+ years

Withdraw from Bucket 1 first. Refill it periodically from Bucket 2. Bucket 3 grows untouched for years.

The Income Floor Strategy

Cover essential expenses with guaranteed income (Social Security, pensions, annuities). Use portfolio withdrawals only for discretionary spending. This approach provides security regardless of market conditions.

Tax Considerations

The 4% rule doesn't account for taxes. Your actual spendable income depends on the source:

Withdrawal Source	Tax Treatment	$40,000 Withdrawal → You Keep
Traditional 401(k)/IRA	Ordinary income tax	~$34,000 (at 15% effective)
Roth 401(k)/IRA	Tax-free	$40,000
Taxable brokerage	Capital gains (0-20%)	~$37,000 (at 15% LTCG)
Social Security	0-85% taxable	Varies

Having a mix of account types gives you flexibility to manage taxes in retirement. Withdraw from Traditional in low-income years, Roth in high-income years.

Practical Application

A Realistic Retirement Income Plan ($1.2M Portfolio)

Income Source	Annual Amount
Social Security (age 67)	$25,000
4% withdrawal ($1.2M)	$48,000
Total gross income	$73,000
Federal tax (est.)	−$5,500
Net spendable	$67,500

That's $5,625/month. No mortgage payment (paid off), no commute costs, no payroll taxes. For most people, this maintains a comfortable lifestyle.

FAQ

Is 4% too conservative?

For a 30-year retirement with traditional asset allocation, 4% has historically been very safe. Some argue 4.5% is fine given Social Security adjustments and spending flexibility. Others argue for 3.5% given current market conditions. The right number depends on your flexibility and risk tolerance.

What if I retire early at 45?

With a 50-year retirement horizon, consider a lower rate — 3% to 3.5%. Alternatively, use the guardrails approach so you can start at 4% but reduce if markets underperform.

No. The 4% rule applies to your investment portfolio only. Social Security is additional income. This is why $1M is often enough — Social Security covers a significant portion of expenses.

Should I adjust for inflation every year?

The standard rule says yes — increase your withdrawal by CPI each year. But many retirees naturally adjust spending based on market performance, which is even better.