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What is the 4% rule?

4% Rule for Retirement Withdrawal — How It Works

Eric Esposito

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The 4% rule is a strategy that aims to help you avoid running out of money in retirement by withdrawing 4% of your savings in the first year, then adjusting that amount annually for inflation. It’s meant to offer a simple approach to managing your retirement withdrawals, but whether it works for you will depend on your savings, spending habits and long-term goals.

Money.ca takeaways

  • The 4% rule offers a simple way to estimate how much you can safely withdraw from retirement savings each year.
  • It’s based on historical market data and assumes a balanced portfolio of stocks and bonds, a 30-year retirement and steady inflation adjustments.
  • While it provides helpful structure, the rule doesn’t account for personal spending changes, unexpected expenses or real-time market conditions.
  • A flexible withdrawal strategy that evolves with your financial needs and market performance may offer more long-term security.

What is the 4% rule?

Despite the name, the "4% rule" is more of a guideline for determining a safe withdrawal rate from your retirement portfolio. Financial adviser William Bengen introduced the 4% rule in 1994 after analyzing historical market data.1

Bengen found that retirees who withdrew 4% of their savings in the first year of retirement — and adjust that amount annually for inflation — could make their money last at least 30 years.

His analysis assumes a portfolio split of 50% to 75% in stocks and 25% to 50% in bonds, specifically using data from the S&P 500 index and the Government Bond Index.2 

Under these conditions, the 4% rule had a 100% success rate in his models.3

How the 4% rule works for retirement withdrawals

The 4% rule is designed to be simple: in your first year of retirement, you withdraw 4% of your total savings. In each following year, you adjust that amount based on the inflation rate — often using data like the Consumer Price Index (CPI).4

Adjusting for inflation may sound complicated, but it really only involves looking up the CPI inflation rate and increasing your previous year’s withdrawal by that percentage. For example, if you withdrew $40,000 in the first year, and inflation was 3%, your withdrawal in the second year would be $41,200.

This approach is intended to make your savings last for about 30 years. However, it doesn’t account for taxes, investment fees or other costs, so those would need to be considered separately.

Example of how the 4% rule works

Let’s say you retire with $1 million in savings. Using the 4% rule, you’d withdraw $40,000 in your first year of retirement. This initial withdrawal amount becomes the baseline for future withdrawals, which are then adjusted each year for inflation.

So, if inflation is 2% in the second year, your withdrawal would increase to $40,800. In the third year, if inflation went up 1%, you’d increase the previous amount by 1%, bringing your withdrawal to $41,208.

While the actual dollar amount increases with inflation, the base amount never changes. That’s why having a solid amount saved at retirement is so important: the 4% you start with sets the tone for the rest of your retirement withdrawals under this strategy.

It’s also worth noting that the 4% rule applies only to your retirement savings, typically your investment portfolio. It doesn’t account for other sources of retirement income like Social Security, pensions or annuities. Those can supplement your withdrawals and help your savings last even longer.

What happens if I withdraw more than 4%?

Withdrawing more than 4% each year, especially early in retirement, increases the risk of running out of money before the end of a 30-year retirement. That’s because your savings may not have enough time to recover from market downturns or keep pace with inflation.

For example, withdrawing 5% or 6% annually might work if you have a shorter retirement horizon or other income sources. But in most cases, higher withdrawals put more strain on your portfolio, reducing its long-term sustainability.

Pros and cons of using the 4% rule

Pros
  • Simple and easy to follow: The 4% rule offers a straightforward formula — withdraw 4% in the first year and adjust annually for inflation. No complex calculation required.
  • Backed by historical data: The rule is based on extensive analysis of past market performance, not guesswork.
  • Encourages discipline: Setting a fixed withdrawal rate can help retirees avoid overspending and preserve their savings.
  • Provides a benchmark: it gives a useful starting point for estimating how much you’ll need in retirement and whether your current savings are on track.
Cons
  • Lacks flexibility: The rule doesn’t account for unexpected expenses, like medical emergencies or major lifestyle changes, which may require higher withdrawals.
  • Doesn’t adapt to market conditions: While the 4% rule is based on historical data that includes market downturns, it assumes a fixed withdrawal strategy. In a severe or prolonged market slump, continuing to withdraw the same amount could increase the risk of running out of money.
  • It’s based on a 30-year retirement: It assumes a three-decade retirement span, which may not apply to everyone, especially those who retire early or live longer than average.
  • Limited to traditional portfolios: The 4% rule is built around a mix of stocks and bonds. It may not work as well for portfolios that include real estate, commodities or other alternative assets.

Is the 4% rule outdated?

The 4% rule still plays a useful role in retirement planning, but it’s no longer seen as a one-size-fits-all solution.5 While historical data supports its effectiveness under special conditions (a 30-year time horizon, a balanced portfolio of stocks and bonds and fixed annual withdrawals), today’s economic environment presents new challenges.

Higher inflation, increased market volatility and longer life expectancies may make the 4% rule less reliable for some retirees. Even William Bengen has suggested that 4% might be too conservative in today’s market, depending on your asset allocation.6

The biggest limitation is the rule’s rigidity. It doesn’t adjust for changes in spending needs or market performance. That’s why many financial advisors now recommend a more flexible, personalized withdrawal strategy tailored to your specific goals and financial situation.

Does the 4% rule work during market lows?

Sticking to a rigid 4% withdrawal can be risky if the market drops early in retirement. When your portfolio loses value, withdrawing the same dollar amount means taking out a large percentage of your remaining assets, which can accelerate the depletion of your savings.

This is known as sequence of returns risk, and it’s one of the biggest threats to retirement sustainability. To reduce that risk, many financial advisors recommend a more flexible withdrawal strategy that adjusts based on market performance. In a down year, it may be wiser to withdraw less and wait for a rebound, rather than locking in losses.

How long will money last using the 4% rule?

The 4% rule is designed to make your retirement savings last for 30 years. This estimate is based on historical averages using a portfolio split between the S&P 500 and the Government Bond Index.

However, real-life results can vary widely depending on factors like market performance, inflation rates and individual spending habits. While the 4% rule offers a helpful benchmark, a more flexible approach including regular portfolio reviews and adjustments can improve your chances of making your money last as long as you need it to.

FAQs

  • How much money do you need to retire with $100,000 a year income?

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    If you're using the 4% rule, you'd need $2.5 million in retirement savings to safely withdraw $100,000 in your first year. Keep in mind that market volatility and inflation can impact how long this withdrawal rate remains sustainable.

  • What is the 25x rule and 4% rule?

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    The 25x rule helps estimate your target retirement savings by multiplying your desired annual income by 25. The 4% rule suggests how much to withdraw each year to make those savings last roughly 30 years.

  • What is the 4% rule for $1,000,000?

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    If you retire with $1 million, the 4% rule recommends withdrawing $40,000 in the first year. You’d then adjust that amount annually for inflation.

Eric Esposito Freelance Contributor

Eric Esposito is a freelance contributor on MoneyWise with an interest in financial markets, investing, and trading. In addition to MoneyWise, Eric’s work can be found on financial publications such as WallStreetZen and CoinDesk. When not researching the latest stock market trends, Eric enjoys biking, walking his dog, and spending time with family in Central Florida. Eric holds a BA in English from Quinnipiac University.

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