The 4% rule
A 4% first-year withdrawal, adjusted for inflation, is a planning benchmark rather than a guarantee. Here is where it breaks.
The 4% rule gets criticised a lot for something it never claimed to be. It is not a withdrawal policy. It is a historical worst-case test, and it answers one question: how much can you take out in a terrible sequence of market returns before the money runs out?
The answer, from the original study, was 4% of the starting balance, adjusted for inflation each year, over thirty years.
Where the number comes from
The rule comes from a 1998 study by three professors at Trinity University, who tested withdrawal rates against US market data from 1926 to 1995. They asked a mechanical question: for every rolling thirty-year period in that window, what withdrawal rate would have survived without the portfolio hitting zero?
| Withdrawal rate | 50/50 stocks and bonds | 75/25 stocks and bonds |
|---|---|---|
| 3% | 100% of periods survived | 100% |
| 4% | 95% | 98% |
| 5% | 80% | 83% |
| 6% | 56% | 68% |
| 7% | 36% | 49% |
Read the 4% row carefully. It is not a guarantee, it is a 95% historical success rate, and the 5% of failures all started retirement immediately before a severe, prolonged bear market — 1929, or 1966. Which is the origin of the entire sequence-of-returns problem: returns in your first decade matter far more than returns in your last.
The cliff is between 4% and 6%, not between 3% and 4%. Below 5%, portfolios survive; above 6%, the outcome depends mostly on when you retired.
Illustrative. Reproduces the published success rates from the 1998 Trinity University study of US market data from 1926 to 1995, with annual inflation-adjusted withdrawals over 30-year periods. Past results do not predict future returns.
Multiplying by twenty-five
The practical use of the rule is the inversion: if 4% of a portfolio can fund a year of spending, then a year of spending needs 25 times the portfolio. Divide 1 by 0.04 and you have the multiplier.
| Annual spending | Portfolio needed | Withdrawals in year one |
|---|---|---|
| $24,000 | $600,000 | $2,000 a month |
| $30,000 | $750,000 | $2,500 a month |
| $40,000 | $1,000,000 | $3,333 a month |
| $50,000 | $1,250,000 | $4,167 a month |
That is the whole calculation, and it works in both directions. Cutting $500 a month from your spending reduces your target by $150,000, which is usually faster to achieve than saving an extra $150,000.
Where a million dollars goes
People hear "a million dollars lasts thirty years" and picture a flat line. The reality is a portfolio that is still working while you draw from it.
- Starting portfolio$1,000,000
- Withdrawal, year 1−$40,000
- Balance after year 1$1,017,600
- Balance after year 15$1,096,500
- Balance after year 30$1,326,700
| Starting portfolio | $1,000,000 |
|---|---|
| Withdrawal, year 1 | −$40,000 |
| Balance after year 1 | $1,017,600 |
| Balance after year 15 | $1,096,500 |
| Balance after year 30 | $1,326,700 |
Thirty years of inflation-adjusted withdrawals total $1.76 million, and the portfolio ends higher than it started. The portfolio is not a bucket you empty.
Illustrative. $1,000,000 at a constant 6% annual nominal return, $40,000 withdrawn in year one and increased by 2.5% each year. Constant returns are unrealistic; real sequences vary and can be far worse.
The line that matters is the last one. On a 30-year horizon at 4%, you take roughly $1.76 million out of a $1 million portfolio and finish with more than you started, in nominal terms. The portfolio is not a bucket you empty. It is a machine that has to keep running, and it keeps running because a normal year's return is larger than the withdrawal.
The rule does not account for your pension
For a German household, the 4% rule overstates the target badly, because the statutory pension covers part of the spending and only the gap has to come from the portfolio.
| Annual spending | Target without pension | Assumed pension | Gap | Portfolio needed |
|---|---|---|---|---|
| 30,000 | 750,000 | 16,000 | 14,000 | 350,000 |
| 40,000 | 1,000,000 | 16,000 | 24,000 | 600,000 |
| 50,000 | 1,250,000 | 16,000 | 32,000 | 800,000 |
Social Security in the US works the same way. A household projecting $40,000 of spending and $16,000 of benefits needs $600,000, not $1,000,000 — which is the difference between retiring at 60 and retiring at 50.
Get the actual projection before you decide the goal is unreachable. In Germany that number arrives annually in the post from the Deutsche Rentenversicherung. In the US it is on your Social Security statement, which takes four minutes to pull online.
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