The 4 Percent Rule: What It Actually Claims

What the original research actually tested

William Bengen, a US financial planner, published the calculation in 1994. He took a portfolio split between US stocks and bonds, ran it through every 30-year window in the market record from 1926 onward, and asked which opening withdrawal rate would have survived even the worst of those windows. The answer sat a shade above 4 percent. The 1998 Trinity study, by three professors at Trinity University in Texas, ran a similar exercise across several stock-and-bond mixes and reported success rates rather than a single number, and the two together are why 4 percent became the figure everybody quotes.

Three details of that design get dropped in the retelling, and each one narrows what the rule promises. The horizon was 30 years, so the test says nothing about year 31. The withdrawal was fixed in real terms: you take 4 percent once, in year one, and from then on the rule governs a euro amount indexed to inflation, not a percentage of the current balance. And success was defined as the portfolio not hitting zero before the 30 years were up — a run that ended with almost nothing counted as a success on exactly the same footing as one that quadrupled.

The four objections that matter

The first is sequence-of-returns risk. Two retirements can experience exactly the same average return over 30 years and end in completely different places, because a crash in the opening years hits a large pot from which withdrawals are still being taken, and the money sold at the bottom is never there to recover. The second is longevity: 30 years is the horizon of someone retiring at 65, but somebody stopping work at 50 needs 40 or 45, and the sustainable rate falls as the horizon lengthens — which is why the early-retirement literature usually works with 3 to 3.5 percent rather than 4.

The third objection is geographic. The backtest used the market that happened to have the best long-run record of the twentieth century, and studies extending the same method to other developed countries have generally found lower sustainable rates over the same decades — anyone applying an American number to a European portfolio is borrowing someone else's history. The fourth is the plainest: fees are deducted before you withdraw anything, so a portfolio charging 1 percent a year gives up a quarter of a 4 percent draw before the first payment leaves the account. That one is entirely within your control, unlike the other three.

Using the arithmetic without treating it as a promise

The division itself is sound and useful: spending divided by rate gives the capital, and the reciprocal gives the multiple — 25 times annual spending at 4 percent, 28.6 times at 3.5 percent, 33.3 times at 3 percent. Read the table as a sensitivity check rather than a target. What it shows most clearly is how expensive caution is: dropping from 4 to 3 percent adds $333,333 to the requirement on the same $40,000 of spending, which is a third more capital and, for most people, several extra working years.

Two adjustments change the picture more than the choice of rate does. Any pension or state benefit reduces the spending the portfolio has to cover, and the pot required falls by the same multiple — a benefit worth $10,000 a year takes $250,000 off the 4 percent requirement. And a withdrawal that flexes, skipping the inflation rise after a losing year or trimming discretionary spending, survives far worse markets than a rigid one, because it stops selling into the fall. None of this is a recommendation about your own situation; it is the arithmetic that sits under the discussion.

Frequently asked questions

Do I take 4 percent of the balance every year, or index the first withdrawal?

The rule as tested indexes the first withdrawal. You take 4 percent once, then raise that amount by inflation each year regardless of what the portfolio did. Taking 4 percent of the current balance every year is a different rule: it can never run out, since you are always withdrawing a fraction of what remains, but your income falls with the market in exactly the years you would least like it to.

Is the 4 percent before or after tax?

Before. The 4 percent is the gross amount leaving the portfolio, and whatever tax applies to that withdrawal in your country comes out of it, as do platform and fund charges. If you need $40,000 to spend and the withdrawal is taxed at 20 percent, the gross figure is $50,000, and the pot the rule implies is 25 times that, not 25 times what you spend.

Does the rule still hold for a 45-year retirement?

It was never tested on one. The backtest ran 30-year windows, so a 45-year retirement sits outside what the research measured, and the sustainable rate falls as the horizon lengthens. Work on very long horizons typically lands between 3 and 3.5 percent, which is why the table above starts at 3 percent rather than at 4 — and why anyone planning to stop work early should read the 3 percent row, not the famous one.