The 4% rule explained

The 4% rule says you can withdraw 4% of your portfolio in your first year of retirement, then raise that dollar amount with inflation each year, and historically your money would have lasted at least 30 years. With $1,000,000 invested, that's $40,000 in year one, $41,200 the next year if inflation runs 3%, and so on, regardless of what markets do.

Where the 4% rule comes from

Financial planner William Bengen published the original study in 1994. He tested every 30-year retirement starting from 1926 onward using US stock and bond returns, and found that a 4% starting withdrawal, raised with inflation, never ran out of money in any historical period, including retiring right before the Great Depression or into the inflation of the 1970s. The worst case, retiring in 1966, still lasted 30 years.

In 1998, three professors at Trinity University (Cooley, Hubbard and Walz) ran a similar analysis. Portfolios of 50% to 75% stocks withdrawing 4% survived 30-year periods roughly 95% or more of the time. That paper, the "Trinity study", is why you'll hear the rule described in terms of success rates.

Your FI number: the 25x rule

The 4% rule flipped around gives the most common FIRE target: save 25 times your annual spending, because 1 ÷ 0.04 = 25. Want to spend $50,000 a year? You need about $1.25 million. A 3.5% withdrawal rate means 28.6x; 3% means 33.3x.

Does the 4% rule work for early retirement?

The original research covers 30 years. Retire at 40 and you may need your money for 50 years or more, which is where the rule gets shakier. Historical simulations put 50-year success at a 4% rate noticeably lower than 30-year success, while 3.25% to 3.5% has held up across almost every historical period. Many early retirees target 3.5% for that reason, or keep 4% and plan to be flexible.

On the other side of the ledger, the rule is arguably conservative in practice:

• It assumes you never cut spending, even after a crash. Real retirees usually do, and small cuts dramatically improve the odds.
• It ignores Social Security, pensions and any part-time income, which reduce what the portfolio must provide later in life.
• In most historical paths the portfolio didn't just survive; it grew. The median outcome after 30 years is several times the starting balance.
• Bengen himself has since argued that a somewhat higher starting rate, around 4.5% to 4.7%, held up for more diversified portfolios.

The real risk: bad timing

The 4% rule's failures all share one cause: poor returns, or high inflation, in the first decade of retirement. Withdrawing from a falling portfolio locks in losses that the later recovery can't repair. That's sequence-of-returns risk, and managing it is most of the work of a safe withdrawal plan.

How to use it

• Use 4% (25x) as a planning target, and 3.5% (about 28.5x) if you're retiring before 50 or want more margin.
• Write down in advance what you'd cut if markets fall 30%: travel, big purchases, a part-time gig. Flexibility is worth more than an extra year of work.
• Stress-test your own numbers with the safe withdrawal rate calculator, which runs thousands of simulated market paths for 30, 40 or 50 years.