The 4% rule is one of the most quoted ideas in retirement planning. It is a simple guide, not a law, and it helps to know both what it says and where it can mislead.
What the rule says
In your first year of retirement, take out about 4% of your savings. In each later year, take out the same dollar amount, raised for inflation. The idea is that your money should last about 30 years.
Example. You retire with $1,000,000.
- Year 1: 4% is $40,000.
- If prices rise 3%, year 2 is $41,200.
- And so on, rising with prices.
Where it comes from
The rule is based on research by financial planner William Bengen, published as "Determining Withdrawal Rates Using Historical Data" in the Journal of Financial Planning in October 1994. He tested different withdrawal rates against historical US market returns for a portfolio of stocks and bonds. He found that, for 30-year retirements in the historical record, a first-year withdrawal of around 4% did not run out of money. A later study by professors Cooley, Hubbard and Walz, "Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable" (AAII Journal, 1998), often called the "Trinity study", reached similar results.
How to use it for planning
You can use the rule backwards to estimate how much you need. Divide the yearly income you want from savings by 0.04. Equivalently, multiply it by 25.
| You want from savings | You may need |
|---|---|
| $20,000 a year | $500,000 |
| $40,000 a year | $1,000,000 |
| $60,000 a year | $1,500,000 |
Remember to count Social Security and any pension first. They reduce how much your savings must provide. The retirement planner does that sum for you.
Limits of the rule
- It is based on the past. The future may differ, especially for shorter or longer retirements, or if markets are weak early on.
- It assumes a fixed mix of stocks and bonds. Your own mix may differ.
- It ignores taxes and fees. Withdrawals from a traditional 401k are taxed, so you keep less than the headline amount.
- It assumes steady spending. Real spending changes: often higher early on, and then lower, with health costs later.
- It is for about 30 years. If you retire early, plan for longer and consider a lower rate.
Many people adjust it
Some planners suggest a lower starting rate for early retirement or in uncertain markets, and some suggest flexible rules, such as taking less after a bad year. Use 4% as a starting point, then test your own plan.
Try different rates
Try our withdrawal calculator to see how long your money lasts at different monthly amounts. Changing the rate by a single point changes the result a lot, which is why it pays to stay flexible.
401k planner Work out how much you may need to retire using a withdrawal rate you choose.Sources
This article is for education and is not financial, tax or legal advice. Figures are checked against the sources above and may change. Read the full disclaimer.