Your complete guide to retirement withdrawal strategies. Learn how the 4% rule works and discover strategies to make your retirement savings last.
The 4% rule is a retirement withdrawal strategy that suggests you can safely withdraw 4% of your initial retirement portfolio balance in the first year, then adjust that amount for inflation each subsequent year (to maintain standard of living), with a high probability that your money will last for 30 years.
If you retire with $1,000,000 saved, you can withdraw $40,000 in your first year. If inflation is 2%, you'd withdraw $40,800 in year 2, $41,616 in year 3, and so on.
This rule was developed by financial planner William Bengen in 1994 and later popularized by the Trinity Study. It's based on historical market data and provides a systematic approach to retirement income planning.
Want to see how the 4% rule works with your own numbers?
Try Our 4% Rule CalculatorThe 4% rule emerged from groundbreaking research in the 1990s that sought to answer a fundamental question:"How much can I safely withdraw from my retirement portfolio without running out of money?"
Financial planner William Bengen analyzed historical data from 1926-1995 and found that a 4% initial withdrawal rate, adjusted for inflation, would have survived all 30-year periods in the historical record.
Professors Philip Cooley, Carl Hubbard, and Daniel Walz expanded on Bengen's work, testing various withdrawal rates and asset allocations. Their research confirmed that 4% was indeed a safe withdrawal rate for most historical scenarios.
The research was based on a portfolio of 50% stocks and 50% bonds, rebalanced annually. The studies looked at rolling 30-year periods, testing how different withdrawal rates would have performed during various market conditions, including the Great Depression and the 1970s inflation.
Add up all your retirement accounts: 401(k), IRA, taxable investments, etc. This is your starting portfolio value.
Multiply your portfolio value by 0.04 (4%). This is your safe withdrawal amount for the first year.
Each subsequent year, increase your withdrawal by the inflation rate to maintain purchasing power.
Regularly review your portfolio performance and consider adjusting withdrawals based on market conditions.
Portfolio Value: $1,000,000
First Year Withdrawal: $1,000,000 × 0.04 = $40,000
Year 2 (2% inflation): $40,000 × 1.02 = $40,800
Year 3 (2% inflation): $40,800 × 1.02 = $41,616
Adjust your withdrawal rate based on market performance. Reduce withdrawals during poor market years and increase them during good years.
Divide your portfolio into buckets: cash for 1-2 years, bonds for 3-10 years, and stocks for long-term growth. This helps manage sequence of returns risk.
Set upper and lower limits for withdrawals. If your portfolio grows significantly, you can increase withdrawals. If it shrinks, reduce withdrawals.
Combine guaranteed income sources (Social Security, pensions, annuities) with portfolio withdrawals to create a more stable retirement income stream.
The 4% rule is based on historical data from 1926-1995. Future market conditions may differ significantly from this period, especially given current low interest rates and high valuations.
Poor market performance in the first few years of retirement can devastate a portfolio's long-term prospects, even if average returns over the entire period are good.
Unexpected high inflation can erode purchasing power faster than the portfolio can keep up, especially if inflation-adjusted withdrawals are maintained.
Living longer than 30 years means the portfolio needs to last longer than the original research period, requiring more conservative withdrawal rates.
The original research didn't account for taxes, investment fees, or other costs that can reduce actual portfolio returns and withdrawal amounts.
Current low interest rates, high stock valuations, and potential for lower future returns suggest that the 4% rule may need to be adjusted downward to 3-3.5% for today's retirees.
Use our 4% rule calculator to see how much you need to save and how long your money will last
Try the Calculator