The 4% rule explained: where 25 times your spending comes from

“How much do I need to retire?” is one of the hardest money questions, because it depends on markets, inflation and how long you will live. The 4% rule turns it into one line of arithmetic. It is a useful starting point, as long as you know what it assumes.

What the rule says

In the first year of retirement, withdraw 4% of your portfolio. Every year after that, withdraw the same amount adjusted for inflation, whatever the markets do. A $1,000,000 portfolio gives $40,000 in the first year; if prices rise 3%, you take $41,200 the next.

The number comes from studies of historical U.S. returns. In 1994, financial planner William Bengen tested withdrawal rates against every 30-year period since 1926 and found that about 4% survived all of them for a portfolio split between stocks and bonds. The 1998 Trinity study by three professors reached a similar result: with at least half the portfolio in stocks, a 4% inflation-adjusted withdrawal lasted 30 years in the large majority of historical periods.

Turning it into a target

Flip the rule around and you get your target, often called your FI number (for financial independence): yearly spending ÷ 4%. That is the same as 25 times what you spend in a year. Spending $40,000 a year means a target of $1,000,000.

Notice what matters: spending, not income. Every $1,000 of yearly spending you cut lowers the target by $25,000, and it also frees up money to save. That is why the FIRE movement (financial independence, retire early) focuses so much on expenses.

An example in today’s money

Take a 35-year-old with $100,000 invested who saves $1,500 a month and wants to spend $40,000 a year. Assume a 7% yearly return and 2.5% inflation, which leaves a real return of about 4.4%. Working in today’s money keeps the target and the savings comparable over decades.

At a 4% withdrawal rate, the target is $1,000,000, reached at age 59. At 3.5%, the target rises to about $1,143,000 and is reached at 61. At 3%, it becomes about $1,333,000 and takes until 64. Half a point of withdrawal rate moves the finish line by two or three years.

When 4% is too high

Long retirements. The research covered 30 years. Someone retiring at 45 may need the money for 45 years or more, and the longer the horizon, the lower the safe rate. Many early retirees plan around 3% to 3.5%.

Bad early years. A market fall in the first years of retirement hurts far more than the same fall later, because you are selling investments at low prices to live on. This sequence-of-returns risk is what made the worst historical periods fail at higher rates.

Costs and taxes. The studies used index returns. Fund fees and taxes on withdrawals come out of the same 4%, so a portfolio that loses 1% a year to fees supports a noticeably lower safe withdrawal rate.

The future is not the past. The rule is a finding about U.S. history, one of the strongest markets of the century. Returns elsewhere, or in the decades ahead, may be lower.

Using the rule sensibly

The 4% rule is best treated as a planning target, not a promise. Being willing to spend a little less after a bad year, or to earn some income in the early years, makes any withdrawal rate far safer than following it rigidly. Pensions or social security reduce the spending your portfolio has to cover, and so lower the target.

Work out your own FI number and the age you could reach it with the retirement calculator. To see why returns are best judged after inflation, read nominal vs. real return, and try the real return calculator.