The 4% rule says you can withdraw 4% of your savings in the first year of retirement, raise that dollar amount with inflation every year after, and expect the money to last about 30 years. It is the most quoted number in retirement planning, and one of the most misread.

Where it came from

In 1994, William Bengen, a financial planner in El Cajon, California, published "Determining Withdrawal Rates Using Historical Data" in the Journal of Financial Planning. He took a portfolio of half stocks and half intermediate-term Treasury notes and tested it for a retiree starting in every year from 1926 on: withdraw a percentage of the portfolio in the first year, then the same amount adjusted for inflation every year after.

At 3%, no portfolio ran out in under 50 years. At 4%, Bengen wrote, "in no past case has it caused a portfolio to be exhausted before 33 years." At 4.25%, a portfolio could run out in as little as 28 years. He called a 5% start risky and 6% or more "gambling," and he recommended holding between 50% and 75% in stocks.

Four years later, three professors at Trinity University (Philip Cooley, Carl Hubbard and Daniel Walz) ran a similar test using the S&P 500 and long-term, high-grade corporate bonds from 1926 to 1995. Their study, published in the AAII Journal, found that withdrawal rates of 3% to 4% held up well for portfolios weighted toward stocks. Between them, the two studies gave the industry its rule of thumb.

What the rule actually is

The 4% rule is a historical worst case, not a forecast. It answers a narrow question: given a particular mix of US stocks and bonds, and the returns and inflation of the past century, what first-year withdrawal never ran out within about 30 years? That is useful, and it is also a long way from "you can safely spend 4% of whatever you have."

Where it breaks

Longer retirements. The rule was built around 30 years. Someone retiring at 50 may need their savings for 40 years or more, and a rate that survived 30 years of history may not survive 40.

Fees and taxes. The Trinity study didn't adjust for taxes or transaction costs. An expense ratio of 1% a year comes straight out of what a portfolio can support, and withdrawals from a traditional 401(k) or IRA are taxed as income, so the money you can spend is less than the money you withdraw.

A different portfolio. Both studies used particular mixes of US stocks and bonds. Bengen found allocations below 50% stocks did worse, not better. A portfolio that holds mostly cash or bonds, or that is invested very differently, isn't covered by the result.

Rigid spending. The rule assumes you raise your withdrawal with inflation every year, whatever markets do. Real people adjust: they skip a trip after a bad year, or spend more early in retirement and less later. Spending that flexes can usually start higher; spending that can't flex at all should start lower.

Your other income. The rule is about a portfolio in isolation. Social Security, a pension or part-time work change how much the portfolio needs to provide, and when.

What to use instead

Use the 4% rule as a sanity check, not a plan. A better answer comes from testing your own situation:

  1. Run your actual plan, with your accounts, taxes, Social Security and spending, through a simulation of many possible markets. The result is a chance of success, which tells you more than a single safe rate.
  2. Decide how flexible your spending is. If you could cut back 10% in a bad stretch, a plan can start with more.
  3. Check your pace once a year, or once a month. A withdrawal rate chosen at 65 isn't a promise. Comparing your real balances with the plan's expected path tells you early whether to adjust.

Try it

The safe withdrawal rate calculator tests a withdrawal rate across 1,000 simulated markets, and the retirement calculator runs your full plan with taxes and Social Security.