The 4% Rule: A Guideline for Retirement Spending

How do you know you won't run out of money in retirement? The 4% rule is a popular rule of thumb derived from historical market data.

How it Works

In your first year of retirement, you withdraw 4% of your total portfolio value. In every subsequent year, you adjust that dollar amount for inflation.

Example: You retire with $1,000,000.
Year 1: Withdraw $40,000.
Year 2 (3% inflation): Withdraw $41,200.

The Trinity Study

The rule comes from a famous study (the Trinity Study) which found that a 50/50 stock/bond portfolio would survive a 30-year retirement 95% of the time using this withdrawal rate.

Limitations

It's Rigid: Real life isn't. You might spend more one year (travel) and less another.
Time Horizon: If you retire early (FIRE) and need money for 50 years, 4% might be too aggressive (try 3% or 3.5%).
Market Valuations: Retiring during a massive bubble might require a lower withdrawal rate.

Real Life Examples

Mrs. Williams

Teacher . $60k . 20% Savings

She retired with $1.5 Million. She uses a 3.5% withdrawal rate ($52,500/yr) to ensure her money lasts 40+ years. She adjusts her spending downward during bad market years to protect her principal.

Mr. Johnson

Average Joe . $90k . 10% Savings

He retired with $900k and sticks strictly to the 4% rule ($36,000/yr). It works well for him now, but he's worried that a long period of high inflation might force him to increase his withdrawals faster than his portfolio grows.

Mr. Smith

Mr. Popular . $120k . 5% Savings

He retired with $600k but tries to maintain his $120k lifestyle. He's withdrawing nearly 10% of his portfolio every year. At this rate, his money will likely be gone in less than a decade.

Learn More

Dive into the data behind the rule: