How the 4% rule works, step by step
The rule sets your first withdrawal as a percentage and every later withdrawal in dollars. That is its defining feature and the part most often misread: after year one, you stop looking at the percentage. Bengen’s paper spelled this out, noting that each later withdrawal is last year’s amount plus an inflation factor, not a fresh share of the balance. The result is a paycheck with steady purchasing power, drawn from a portfolio whose value is left to move. In order:
- Add up the investments that will fund retirement on the day you stop working.
- Multiply by 4% to get the first year’s withdrawal: $40,000 on $1,000,000.
- Each later year, raise last year’s dollar amount by inflation. After the CPI-U’s 3.4% rise in the 12 months to August 2026, $40,000 would become $41,360.
- Do not cut after a bad year or raise after a good one; the rule assumes steady real spending.
- Hold roughly 50%–75% in stocks and rebalance, the range Bengen recommended.
Where the 4% rule came from
William Bengen, a financial planner in El Cajon, California, published “Determining Withdrawal Rates Using Historical Data” in the Journal of Financial Planning in October 1994. He replayed US market history from 1926 through a portfolio split evenly between stocks and intermediate-term Treasuries, raised withdrawals with inflation, and looked for the highest starting rate that lasted at least 30 years from every start date.
A 4% start never ran out in under 33 years; a retiree starting in 1966, one of the hardest years, still had 33 years of withdrawals. At 4.25%, the money could run out in 28 years. Bengen called 5% risky and 6% or more gambling, and he favored holding between 50% and 75% in stocks. He did not present 4% as universal: he suggested finding each client’s rate from the portfolio life they needed, and noted that for clients aged 60–65 it would usually be about 4%.
Four years later the Trinity study reached a similar figure with a different method, and the shorthand “4% rule” took hold. Many safe withdrawal rate studies since have retested the figure with other data and methods.
4% rule vs. other withdrawal methods
Every withdrawal method trades off two goals: a steady income and a portfolio that cannot run dry. By fixing real spending, the 4% rule gives the most predictable budget and puts all the market risk on the balance. Taking a fixed percentage of each year’s balance does the opposite: the portfolio can never reach zero, but income swings with every market move. Dynamic spending rules such as guardrails blend the two, holding spending steady until the current rate drifts past a band. An Annuity hands the risk to an insurer in exchange for a lump sum, and the IRS table for required distributions sets a share that rises with age. The table below lines them up.
Limits of the 4% rule
The 4% figure carries its test conditions with it, and several rarely match a real retirement. The research used US returns since 1926, one country’s history, over 30-year horizons. It assumed index returns with no fund or advisory fees, and Bengen treated the savings as sitting in tax-deferred accounts, so income tax has to come out of the withdrawal itself. It also assumed a retiree who never changes course.
That last assumption cuts both ways. Few people keep raising withdrawals through a crash, and actual spending often drifts down in later retirement, as the retirement spending smile describes. Meanwhile, in most historical periods the rule was too cautious: Bengen found that a 4% start usually lasted 50 years or longer, leaving large balances unspent. The rule protects against the worst sequences on record by underspending in the typical one.
How people adapt the 4% rule
Because the rule is a starting point, many plans change one or more of its inputs rather than follow it literally. Each adjustment below trades some of the rule’s simplicity for a closer fit to a particular retirement, and each can be tested against market history the same way the original figure was. FINRA’s investor guidance points the same way: start withdrawing conservatively and be ready to adjust if costs rise or returns disappoint. Common adjustments:
- Raise spending after strong markets: because a 4% start usually left a large balance, some retirees give themselves a raise once the portfolio grows well past where it began.
- Cut after bad years: Bengen showed that a 1929 retiree who trimmed withdrawals by just 5% had 20% more wealth by 1949.
- Skip the inflation raise after a losing year, a milder way to respond to markets.
- Bridge to Social Security: draw more from savings before benefits start and less after, rather than one flat rate.
- Mind the tax: size withdrawals from pre-tax accounts to cover the income tax they create.
Illustrative numbers
The 4% rule on a $1,000,000 portfolio through a bad first year
- Starting portfolio
- Investments available on the first day of retirement
- 4%
- The initial withdrawal rate; it is not used again after year one
- Inflation
- The past year’s change in consumer prices, usually the CPI-U; negative in a deflation year
Some versions skip the raise after a losing year; the original research never did.
Portfolio at retirement$1,000,000
Year 1 withdrawal (4%)$40,000
Balance after the withdrawal and a 20% market fall$768,000
Inflation during year 13%
Year 2 withdrawal ($40,000 × 1.03)$41,200
Year 2 withdrawal as a share of the portfolio5.4%
The rule keeps spending power level, so the second withdrawal rises to $41,200 even though the balance fell to $768,000, and the current withdrawal rate jumps to about 5.4%. Early losses paired with rising withdrawals are how the rule fails, the risk known as sequence of returns risk.
At a glance
The 4% rule compared with other ways to set retirement withdrawals
| Method | How each year’s withdrawal is set | Income stability | Can the money run out? |
|---|---|---|---|
| 4% rule | 4% of the starting balance, then last year’s amount plus inflation | Steady in real terms | Yes, if early returns are poor |
| Fixed percentage | A set share, such as 4%, of each year’s starting balance | Rises and falls with markets | No, but income can shrink sharply |
| Guardrails | Steady until the current rate crosses a band, then cut or raised | Mostly steady, with occasional steps | Less likely, because spending adapts |
| RMD-style | Balance ÷ IRS life-expectancy divisor, such as 26.5 at 73 | Varies; the share rises with age | No, but income follows the balance |
| Income annuity | An insurer pays a set amount for life | Fixed, sometimes with raises | No, subject to the insurer’s ability to pay |
Put it in your plan
4% Rule in MoneyWhatIf
With the Spending Simulator off, every retired year spends what its spending cards say, and a card set to track inflation keeps its purchasing power: the fixed real spending the 4% rule assumes. To see that path under strain, land a named crisis such as 1973 or 2000 on your first retired year with the Market Simulator. To compare a withdrawal that moves with markets, switch the Spending Simulator to its fixed portfolio percentage rule, which budgets 4% of last year’s closing balances by default.
Common questions
4% Rule FAQs
How much do I need to retire with the 4% rule?
Multiply the yearly amount your portfolio must supply, including the tax on pre-tax withdrawals, by 25, because 4% is one twenty-fifth. If you expect to spend $70,000 a year and Social Security will pay $30,000, the portfolio must supply $40,000, so the target is $1,000,000. That shortcut is the rule of 25, and the result is often called your FI number. A lower starting rate raises the multiple: about 28.6 times at 3.5% and 33.3 times at 3%.
Does the 4% rule adjust for inflation?
Yes, that is the heart of it. The first withdrawal is 4% of the portfolio, and every later withdrawal is the previous year’s amount adjusted by inflation, usually measured by the Consumer Price Index. In the original research the amount also fell in deflation years. A version that never raises withdrawals is a different rule: in the Trinity data, flat withdrawals generally succeeded more often than inflation-adjusted ones at the same starting rate.
Is the 4% rule before or after taxes?
Before. The 4% is a gross withdrawal, and any income tax it triggers comes out of it. Pre-tax withdrawals from a 401(k) or traditional IRA are ordinary income, qualified Roth withdrawals are tax-free, and sales in a taxable account are taxed only on the gain. A retiree with mostly pre-tax savings therefore spends less than 4% after tax, which is why the order you draw from accounts matters; see tax-efficient withdrawals.
Does the 4% rule work for early retirement?
It was built for about 30 years. An early retiree leaving work at 40 or 45 may need the money for 45 to 50 years, and in Bengen’s data only first-year rates of 3% to about 3.5% lasted at least 50 years from every starting point. For FIRE plans, that points to starting nearer 3%–3.5%, or to keeping 4% with a plan for flexibility, such as part-time income or spending cuts after bad years.
Does the 4% rule include Social Security?
No. The rule applies only to your investment portfolio. Subtract Social Security, pensions and other reliable income from your spending first, then apply the rule to what is left. Benefits can start at 62, and waiting past full retirement age, 67 for anyone born in 1960 or later, earns 8% a year up to 70, so the portfolio may carry more of the load before benefits begin than after.
What happens to the 4% rule when RMDs start?
Required minimum distributions can exceed what the rule says to spend. At 80, for example, the IRS divisor of 20.2 means about 4.95% of a traditional IRA must come out. You owe income tax on the distribution, but you do not have to spend it: reinvest the surplus in a taxable account and keep following the rule for spending. See required minimum distributions.