The 4% Rule Explained: How Much Can You Actually Withdraw in Retirement?

The 4% rule is probably the most cited number in personal finance. Ask anyone in the FIRE community how much they need to retire, and they’ll multiply their annual spending by 25. That’s the 4% rule. But most people who cite it don’t fully understand where it came from, what it actually proves, or — crucially — where it breaks down.

This is the complete guide. By the end, you’ll understand the rule well enough to use it, challenge it, and adapt it to your own situation.

Where the 4% Rule Came From

The 4% rule originates from a 1994 paper by financial planner William Bengen, later reinforced by the Trinity Study — a landmark 1998 paper from three finance professors at Trinity University in Texas.

Bengen ran historical simulations of retirement portfolios using actual US market data going back to 1926. He wanted to answer a specific question: what’s the highest withdrawal rate that a retiree could have sustained throughout history without running out of money over a 30-year retirement?

His answer was 4%. Specifically, he found that a portfolio of 50–75% stocks and 25–50% bonds could sustain annual withdrawals of 4% of the initial portfolio value — adjusted upward each year for inflation — across every historical 30-year period he tested, including the Great Depression, the stagflation of the 1970s, and multiple market crashes.

The Trinity Study expanded on this, testing different portfolio compositions and timeframes, and largely confirmed Bengen’s finding. Across the historical data they tested, a 4% initial withdrawal rate succeeded in keeping a retirement portfolio alive for 30 years in the vast majority of scenarios.

What the 4% Rule Actually Says

The rule works like this:

1. Estimate your annual retirement spending
2. Multiply by 25 — that’s your target retirement portfolio
3. In your first year of retirement, withdraw 4% of your starting portfolio
4. Each subsequent year, adjust your withdrawal amount by inflation (not recalculate 4% of the current balance)

The key detail most people miss: the 4% is calculated on your starting balance, not your current balance. And it’s adjusted for inflation each year, not held flat.

So if you retire with $1,000,000 and inflation runs at 3%:

• Year 1: Withdraw $40,000 (4% of $1M)
• Year 2: Withdraw $41,200 (last year’s $40K + 3% inflation)
• Year 3: Withdraw $42,436
• And so on…

This is important. The 4% rule isn’t “withdraw 4% of whatever you have each year.” It’s “withdraw an inflation-adjusted amount that started at 4% of your initial balance.” These are very different strategies, and the distinction matters enormously for how long your money lasts.

The 25x Rule: The Saving Side of the Same Coin

The 4% rule implies its reciprocal — the 25x rule. If a safe withdrawal rate is 4% per year, then you need 100% ÷ 4% = 25x your annual spending saved to retire.

This is why people in the FIRE community focus on their expenses as much as their income. Every $1,000 you cut from your annual spending doesn’t just free up $1,000 per year — it reduces your retirement target by $25,000, because you need 25x less.

A family that gets their annual spending from $80,000 down to $60,000 doesn’t just save $20,000 per year. They reduce their retirement target by $500,000. Both effects compound.

The Real Historical Success Rate

The Trinity Study didn’t find 100% success for 4% across all scenarios — and it’s worth knowing what success actually looked like.

For a 30-year retirement with a 60% stock / 40% bond portfolio:

• At a 3% withdrawal rate: near-perfect historical success
• At a 4% withdrawal rate: roughly 95% historical success
• At a 5% withdrawal rate: roughly 80% historical success
• At a 6% withdrawal rate: roughly 67% historical success

That 95% figure for 4% sounds reassuring, but it means roughly 1 in 20 historical 30-year retirements would have run out of money. The failures mostly cluster around retirements that started just before severe market downturns — the late 1960s being the classic example, when a retiree who started in 1966 hit brutal inflation and a flat stock market simultaneously.

Sequence of Returns Risk: The Hidden Danger

The biggest threat to a 4% withdrawal strategy isn’t a low average return — it’s a terrible sequence of returns in the early years of retirement. This is called sequence of returns risk, and it’s the reason the 4% rule can fail even when long-run market averages look fine.

Here’s why it matters: if your portfolio drops 40% in years 1–3 of retirement and you’re still withdrawing 4% of your original balance each year, you’re selling a much larger percentage of your reduced portfolio to fund those withdrawals. You lock in losses at the worst possible time. Even if the market fully recovers over the following decade, you may have sold so much at the bottom that your portfolio can’t fully benefit from the recovery.

The reverse is also true. If you experience strong returns in the first decade of retirement, you’re largely safe — your portfolio builds a buffer that can absorb bad returns later.

This is why the order of returns matters more than the average return. Two retirements with identical 30-year average returns but different sequences can have wildly different outcomes.

Does the 4% Rule Still Apply Today?

This is the most contested question in retirement planning right now. There are credible arguments on both sides.

The case for caution: The 4% rule was developed using US market historical data during a period of relatively high bond yields. Today’s starting valuations are higher than historical averages, and bond yields — while recently recovered — spent over a decade near zero. Some researchers, most notably Wade Pfau, have argued that a more conservative 3–3.5% withdrawal rate better reflects expected future returns.

The case for confidence: The rule was specifically designed around worst-case historical scenarios, including the 1966 retiree who faced the worst conditions ever documented. Markets have recovered from every downturn in the data set. And the rule was tested over 30 years, not 20 or 40.

The pragmatic middle ground: Most financial planners suggest treating 4% as a reasonable starting point rather than a guaranteed ceiling. If you retire at 65 with a 30-year horizon, 4% has very strong historical backing. If you retire at 40 with a 50+ year horizon, a lower withdrawal rate of 3–3.5% is more prudent.

Adjustments That Make the 4% Rule More Robust

The rigid version of the rule — withdraw exactly 4% of initial balance, inflation-adjusted, every single year regardless of market performance — is more conservative than how most people actually retire. Several adjustments can increase your margin of safety:

Flexible spending: In years where your portfolio has dropped significantly, reduce discretionary spending by 10–15%. This is the “guardrails” approach and dramatically improves success rates across poor market environments.

Variable percentage withdrawal: Instead of a fixed dollar amount adjusted for inflation, withdraw a fixed percentage (say, 3.5%) of your current balance each year. This means withdrawals rise and fall with your portfolio, which protects against running out of money at the cost of some income variability.

Separate buckets: Keep 1–2 years of expenses in cash or short-term bonds. When markets fall, draw from the cash bucket rather than selling equities. This sidesteps sequence of returns risk in bad years and gives your stock portfolio time to recover.

Part-time income: Even modest income — a few hundred dollars a month from freelancing, consulting, or a passion project — dramatically reduces the withdrawal rate you need from your portfolio. Withdrawing $30,000 per year from a $1M portfolio is a 3% rate. Earning $10,000 per year from part-time work means you only need to withdraw $20,000 — a 2% rate with enormous safety margin.

The 4% Rule and Coast FIRE

The 4% rule is what determines your retirement target — which is what makes it directly relevant to Coast FIRE planning.

Your coast number is the amount you need invested today so that compound growth alone (no additional contributions) reaches your 25x retirement target by the time you retire. To use our Coast FIRE Calculator, you need to know your target number — and the 4% rule gives you that.

Step 1: Estimate your annual retirement spending.

Step 2: Multiply by 25 to get your retirement target (the 4% rule).

Step 3: Enter your retirement target as your “final goal” to find the coast number you need today.

For example: if you plan to spend $60,000 per year in retirement, your target is $1,500,000. If you’re 30 and want to retire at 60 (30 years), your coast number at 8% returns is approximately $149,000. Hit $149,000 invested by age 30, stop contributing entirely, and you’ll reach $1.5M by 60.

What the 4% Rule Doesn’t Cover

The rule is a useful planning framework, not a guarantee. Here’s what it doesn’t account for:

Healthcare costs: US healthcare expenses in retirement can be substantial and grow faster than general inflation. If healthcare is a significant portion of your budget, your expenses may inflate faster than the CPI adjustment the rule assumes.

Social Security and pension income: If you’ll receive Social Security or a pension, you don’t need your portfolio to cover your full retirement expenses. A couple receiving $30,000 per year in combined Social Security who spends $70,000 per year only needs their portfolio to generate $40,000 — requiring $1,000,000 rather than $1,750,000. Always subtract guaranteed income sources before calculating your required portfolio.

Taxes: The 4% rule calculations are typically pre-tax. If your portfolio is in a traditional IRA or 401(k), your withdrawals are taxable. Account for your effective tax rate when estimating how much you need to withdraw to cover after-tax spending.

Unusual longevity: The 30-year frame assumes you retire around 65. Retire at 40 and you might need 50+ years of withdrawals. The historical success rate for 4% over 50 years is lower than for 30 years, and a slightly more conservative rate — 3.25–3.5% — is more appropriate for very early retirees.

The 4% Rule in One Sentence

Save 25x your annual spending. In retirement, withdraw 4% of that initial balance in year one, then increase your withdrawals with inflation each year. Historically, this has worked across 95% of all 30-year periods in US market history, including every major crash and economic crisis of the 20th century.

It’s not a guarantee. It’s not perfect for every situation. But as a starting point for retirement planning, it’s backed by decades of serious research and has survived every historical stress test thrown at it.

Know the number. Build toward it. And use the rest of the framework — flexible spending, part-time income, spending guardrails — to make the plan more resilient once you get there.