What is the 4% rule?

The rule comes from financial planner William Bengen’s 1994 research, later reinforced by the Trinity Study. Testing every 30-year retirement window in US market history — including retirements starting just before the Great Depression and the 1970s stagflation — Bengen found that a portfolio of roughly 50-75% stocks and the rest bonds survived a 4% initial withdrawal rate, adjusted for inflation each year, in essentially every historical period.

Mechanically it works like this: retire with $1,000,000 and withdraw $40,000 in year one. If inflation runs 3%, withdraw $41,200 in year two, regardless of what the market did. The inflation adjustment is the point — it maintains purchasing power, and it is also what makes bad early years dangerous, since you keep withdrawing an inflating amount from a shrunken portfolio.

The rule has real limitations. It was built on US historical returns, which were among the world’s best; it assumes a 30-year horizon, which may be short for early retirees; and it ignores taxes and investment fees. Sequence-of-returns risk is the biggest threat: two retirees with identical average returns can have wildly different outcomes depending on whether the bad years come first. Some researchers now suggest 3.5% for longer retirements, while flexible-spending approaches (skipping inflation raises after down years) can safely support more.

Its best use is as a planning target rather than a rigid withdrawal script. Multiply your expected annual spending by 25 to get a savings goal, subtract guaranteed income like Social Security or pensions first, and revisit the plan every few years. A retirement calculator lets you test how your balance, contributions, and withdrawal rate interact.