The 4% rule: how much can you safely withdraw?
Key takeaways
04 · ideas- 4% rule comes from the 1998 Trinity Study
- $1M portfolio → $40,000/year indefinitely
- Use 3–3.5% for retirements longer than 30 years
- Sequence of returns risk is the biggest threat
Basic level
The essentials · 1 min
The 4% rule is a retirement planning guideline: if you withdraw 4% of your portfolio in year one, then adjust for inflation each year, historical data shows your money will last at least 30 years in 95%+ of scenarios.
The simple math:- $500,000 portfolio → $20,000/year
- $1,000,000 portfolio → $40,000/year
- $2,000,000 portfolio → $80,000/year
This means your FIRE number — the amount you need to retire — is simply your annual expenses × 25.
If you spend $50,000/year, you need $1,250,000.
Intermediate level
How it applies · 1 min
Where the 4% rule comes from
The Trinity Study (Cooley, Hubbard, and Walz, 1998) analyzed every 30-year period from 1926–1995 using historical stock and bond returns. They tested withdrawal rates from 3% to 12% across various portfolio allocations.
Results for a 50% stocks / 50% bonds portfolio:
| Withdrawal rate | Success rate (30 yrs) |
|---|---|
| 3% | 100% |
| 4% | 95% |
| 5% | 80% |
| 6% | 68% |
| 7% | 56% |
Why 4% and not 3%? The 1% extra per year compounds significantly. On a $1M portfolio, 3% = $30,000/year vs 4% = $40,000/year — a $10,000 difference that adds up fast in early retirement.
Adjustments for longer retirements:- 30-year retirement → 4% is well-supported
- 40-year retirement → 3.5% is safer
- 50+ year retirement → 3% or use dynamic withdrawal
Advanced level
The math, step by step · 2 min
Sequence of returns risk: the real danger
The 4% rule's success depends heavily on when bad returns occur. Two portfolios with identical average returns over 30 years can have dramatically different outcomes depending on the order of returns.
Example: Portfolio A gets -30% in year 1, then averages +10% for 29 years. Portfolio B gets +10% for 29 years, then -30% in year 30.
Portfolio A will likely fail (you're withdrawing during the crash, permanently depleting principal). Portfolio B survives easily.
The math: If you withdraw $40,000 from a $1M portfolio and the market drops 30% in year 1:- Portfolio value after withdrawal + loss: $1M - $40k - (0.30 × $960k) = $672,000
- You now need $672k to grow back to $1M — a 49% gain just to break even
- Simultaneously, you're taking another $40,000+ in year 2
- Cash buffer: Keep 1–2 years of expenses in cash to avoid selling equities in down markets
- Dynamic withdrawal: Reduce withdrawals by 10% in bad years (Guyton-Klinger rules allow 4.5–5% initial rate with this guardrail)
- Bond tent: Hold higher bond allocation early in retirement, shift back to stocks as sequence risk decreases
Where W_1 is first-year withdrawal, P_0 is initial portfolio, i is inflation, t is years elapsed.