The 4% Rule
The 4% rule is a widely used retirement withdrawal guideline derived from the Trinity Study (1998). It states that a retiree with a diversified 50–75% stock portfolio can withdraw 4% of their initial portfolio per year, adjusting for inflation annually, with a historically high probability of not running out of money over 30 years. This is not a guarantee of future outcomes.
How It Works
- Calculate your annual retirement expenses
- Multiply by 25 (the inverse of 4%) to get your target portfolio size
- In Year 1, withdraw 4% of your portfolio
- Each subsequent year, adjust the withdrawal amount by inflation
Example:
| Annual Spending | Portfolio Required | |----------------|-------------------| | $40,000 | $1,000,000 | | $60,000 | $1,500,000 | | $80,000 | $2,000,000 | | $100,000 | $2,500,000 |
Origins of the Rule
The Trinity Study backtested withdrawal rates against 50 years of stock and bond market data. A 4% rate with a 50/50 stock/bond portfolio had a 95%+ success rate (portfolio survived 30 years) across historical market cycles, including the Great Depression and 1970s stagflation.
Limitations
- Assumes 30-year retirement. If you retire at 50, you may need 40–45 years, requiring a more conservative 3–3.5% rate.
- Not guaranteed. Historical success rates are not future guarantees. A sustained low-return environment (CAPE ratio above historical norms) may require adjusting.
- Healthcare costs. Rising healthcare expenses in retirement can eat into withdrawals beyond CPI adjustments.
- Sequence of returns risk. Retiring into a bear market and withdrawing from a declining portfolio accelerates depletion.
The "25× Rule" (Inverse)
The 4% rule directly implies the 25× rule for retirement savings: you need a portfolio equal to 25 times your annual spending to retire.
Related Tools
- Retirement Calculator — Project when your savings will reach 25× your expenses.
- Compound Interest Calculator — Model the growth rate needed to reach your retirement number.
- Inflation Calculator — Adjust your retirement spending target for inflation.
→ Read the full guide: How to Plan Your Retirement