The 4% Rule: Safe Withdrawal Rate Explained

The 4% rule is one of the most widely cited retirement withdrawal strategies. Developed by financial planner William Bengen in 1994, it suggests that retirees can safely withdraw 4% of their initial retirement savings in the first year, then adjust that amount for inflation each subsequent year, with a high probability of their money lasting 30 years. This guide explains how it works, when to use it, and important considerations for applying it to your retirement plan.

What Is the 4% Rule?

The 4% rule provides a simple framework for determining how much you can withdraw from your retirement savings each year without running out of money. Here's how it works:

1. Calculate 4% of your total retirement savings at the start of retirement
2. Withdraw that amount in your first year
3. Adjust that dollar amount for inflation each year thereafter

For example, if you retire with $1 million:

• Year 1: Withdraw $40,000
• Year 2: Withdraw $40,000 × (1 + inflation rate) ≈ $41,200 (assuming 3% inflation)
• Year 3: Withdraw $41,200 × (1 + inflation rate), and so on

How Bengen Developed the Rule

Bengen analyzed historical market data from 1926 to 1976, testing various withdrawal rates and asset allocations. He found that a 4% withdrawal rate, applied to a portfolio of 50% stocks and 50% bonds, successfully lasted 30 years in all historical scenarios tested—even through the Great Depression and the high inflation periods of the 1970s.

The rule assumes:

• A balanced portfolio (typically 50-60% stocks, 40-50% bonds)
• A 30-year retirement horizon
• Annual withdrawals adjusted for inflation
• Reasonable market returns over the long term

Why 4% Is Considered "Safe"

The 4% rule is conservative by design. It's designed to withstand worst-case historical scenarios, including:

• Market crashes early in retirement (sequence of returns risk)
• Periods of high inflation
• Extended bear markets

In most historical periods, retirees following the 4% rule ended retirement with significant remaining assets. The rule prioritizes not running out of money over maximizing withdrawals.

When the 4% Rule May Not Apply

While useful as a starting point, the 4% rule has limitations:

Longer retirement horizons: If you retire early or expect to live beyond 30 years, you may need a lower withdrawal rate (3% or 3.5%).

Low expected returns: If you believe future market returns will be lower than historical averages, a more conservative approach (3-3.5%) may be prudent.

High stock allocation: Portfolios with very high stock allocations (80%+) may require a slightly lower initial withdrawal rate due to increased volatility.

Very low bond allocations: Conversely, very conservative portfolios may support higher withdrawal rates but with lower expected growth.

Healthcare costs: If you expect significant healthcare expenses not covered by insurance, you may need to withdraw less or plan for these separately.

Adjusting the Rule for Your Situation

Conservative approach (3-3.5%): Use if you want extra safety, have a longer retirement horizon, or prefer less risk.

Moderate approach (4%): Standard approach for most retirees with a 30-year horizon and balanced portfolio.

Aggressive approach (4.5-5%): Higher withdrawals with increased risk of running out of money; requires careful monitoring and flexibility.

Sequence of Returns Risk

One critical factor the 4% rule addresses is "sequence of returns risk"—the danger that poor market performance early in retirement can deplete your savings faster than expected, even if average returns are good.

For example:

• Two retirees both average 7% returns over 30 years
• Retiree A gets poor returns in years 1-5 but great returns later
• Retiree B gets great returns early but poor returns later
• Retiree A is more likely to run out of money despite the same average return

The 4% rule's conservative nature helps protect against this risk.

Dynamic Withdrawal Strategies

Some retirees prefer more flexible approaches:

Guardrails strategy: Withdraw 4% when markets are good, reduce to 3.5% during downturns, and increase back up during recoveries.

Percentage of portfolio: Withdraw a fixed percentage (e.g., 4%) of your current portfolio balance each year, rather than a fixed dollar amount adjusted for inflation. This reduces withdrawals during market downturns.

Floor and ceiling: Set a minimum withdrawal amount to cover essential expenses and a maximum to avoid overspending during good years.

Practical Application

To use the 4% rule with our Retirement Calculator:

1. Set your "Withdrawal Rate" to 4%
2. The calculator will show your estimated annual and monthly withdrawals
3. Use this to estimate whether your projected savings will support your desired lifestyle

Remember: The calculator's withdrawal estimate assumes you maintain the withdrawal rate throughout retirement. In practice, you may adjust based on market conditions and your needs.

Taxes and Withdrawal Rates

The 4% rule typically refers to gross withdrawals before taxes. Your actual after-tax income will be lower depending on:

• Tax rates on different account types (traditional 401(k)/IRA vs. Roth vs. taxable)
• Your total income and tax bracket
• State tax rates

Plan for taxes separately when calculating your actual spending power.

Common Misconceptions

"I can always withdraw 4% regardless of market conditions": While the rule provides a framework, flexibility helps during market downturns.

"The rule guarantees I won't run out of money": No strategy is foolproof, but the 4% rule provides a high probability of success based on historical data.

"I should withdraw exactly 4% every year": The rule is a guideline. Many retirees adjust based on actual needs and market conditions.

"The rule applies to all portfolios equally": Your asset allocation affects the rule's applicability. More conservative portfolios may require adjustments.

Monitoring and Adjusting

Even if you start with the 4% rule, regularly review:

• Your portfolio performance
• Actual spending vs. planned withdrawals
• Healthcare costs and other unexpected expenses
• Changes in your life expectancy or retirement goals

Consider working with a financial planner to help adjust your strategy over time.

Frequently Asked Questions

Is the 4% rule still valid today?

Yes, though some experts suggest using 3.5-3.8% given lower expected bond returns. The rule remains a valuable starting point for most retirees.

Should I use 4% of my current balance each year?

No. The classic rule uses 4% of your initial retirement balance, adjusted for inflation. Using 4% of your current balance each year creates a different dynamic withdrawal strategy.

What if I retire early?

Early retirees may want to use a 3-3.5% withdrawal rate to account for a longer retirement horizon.

How does Social Security affect the rule?

Social Security income is separate from your 4% withdrawal. The rule applies to your investment portfolio. If Social Security covers most of your expenses, you may need smaller withdrawals.

Keep Exploring

• Calculate your retirement needs with our Retirement Calculator
• Learn How Much You Need to Retire
• Explore strategies for Maximizing Retirement Accounts
• Consider Early Retirement Planning

Sources

• Bengen, William P. (1994). "Determining Withdrawal Rates Using Historical Data." Journal of Financial Planning
• Trinity Study – Updated research on safe withdrawal rates
• Fidelity Investments – Retirement withdrawal strategies