4% Rule

The 4% Rule

The 4% Rule, developed by financial planner William Bengen in 1994, states that retirees can withdraw 4% of their portfolio in the first year of retirement, then adjust that dollar amount for inflation each year, with a high probability of the money lasting at least 30 years.

How the 4% Rule Works

Year 1: Withdraw 4% of initial portfolio value Subsequent years: Adjust for inflation (not 4% of current value)

Year	Portfolio Value	Withdrawal (3% inflation adj)	Withdrawal Rate
1	$1,000,000	$40,000	4.00%
2	$1,020,000	$41,200	4.04%
5	$1,080,000	$45,000	4.17%
10	$1,150,000	$52,200	4.54%
20	$980,000	$70,100	7.15%

Key Assumptions (Original Study)

• 30-year retirement — based on retiring at 65, living to 95
• 50/50 stock/bond allocation — balanced portfolio
• Historical U.S. returns — 1926-1992 data
• Annual rebalancing — maintaining target allocation
• Success rate: 95%+ across all 30-year periods tested

Criticisms and Modern Adjustments

Concern	Impact	Adjustment
Low bond yields	May reduce safe rate	Consider 3.3-3.5%
Longer retirements	40+ year horizons	Reduce to 3.5%
International data	Non-U.S. markets less favorable	Use 3.5% globally
High valuations	CAPE > 30 may warrant lower rate	Dynamic adjustments
Flexible spending	Can cut spending in bad years	May allow 4.5%+

Example

A couple retires at 60 with $1,200,000:

• Year 1 withdrawal: $1,200,000 x 4% = $48,000
• Year 2 (3% inflation): $48,000 x 1.03 = $49,440
• Year 10: Approximately $62,600 (inflation-adjusted)
• Combined with Social Security of $30,000/year = $78,000-$92,000 annual income

Why It Matters

The 4% Rule provides a simple, research-backed starting point for retirement planning. While not perfect for every situation, it gives investors a concrete target: save 25x your annual expenses (the inverse of 4%) to achieve financial independence. Many in the FIRE movement use this rule as their savings target.