What Is the 4% Rule for Retirement and Does It Still Work?
Understand where the 4% retirement withdrawal rule came from, how to apply it simply, and whether it is still valid advice in today's economic environment.
Where the 4% Rule Came From
The 4% rule originated from a 1994 study by financial advisor William Bengen. He analyzed historical stock and bond market returns going back to 1926 and found that retirees who withdrew 4% of their initial portfolio value per year, adjusted for inflation annually, could sustain their withdrawals for at least 30 years in virtually every historical scenario.
The study used a portfolio of roughly 60% stocks and 40% bonds. The 4% withdrawal rate held up even during the worst historical periods for markets, including the Great Depression, the 1970s stagflation era, and other periods of poor returns.
This research was later supported by additional analysis, including the Trinity Study in 1998, which confirmed similar findings across various portfolio compositions and withdrawal rates. The 4% rule became the de facto standard for retirement planning discussions.
How to Apply It in Simple Terms
The application is straightforward. Multiply your expected annual retirement spending by 25. The result is the portfolio size you need to retire sustainably under the 4% rule. If you plan to spend $60,000 per year in retirement, you need $1.5 million saved ($60,000 times 25).
Once you retire, you withdraw 4% of your initial portfolio value in year one: $60,000 from a $1.5 million portfolio. In subsequent years, you adjust the dollar withdrawal amount for inflation, not recalculate 4% of the current balance. If inflation is 3%, you take $61,800 in year two regardless of whether your portfolio went up or down.
The rule assumes a 30-year retirement horizon. If you retire at 65, it is designed to last until 95. If you retire earlier and expect a longer retirement, the 4% rate may be too aggressive.
Why Some Experts Now Question It
Several factors have led some financial planners to suggest a lower safe withdrawal rate, perhaps 3% to 3.5%. The primary concern is that interest rates on bonds were historically higher than in the post-2008 era, and bond returns are lower going forward. A balanced portfolio may produce lower total returns than the historical average that underpinned the original research.
Sequence of returns risk is another concern. If a market downturn occurs early in retirement, the combination of poor returns and ongoing withdrawals can deplete a portfolio faster than historical averages suggest. The 4% rule historically held up across all starting years, but some researchers argue that starting valuations (how expensive stocks are when you retire) also matter.
Life expectancy has also increased. A 30-year retirement horizon was conservative in 1994, but with modern medicine and a 65-year-old who may live to 95 or 100, a 35-year retirement is increasingly common. The longer the horizon, the more risk the 4% rate carries.
The Practical Bottom Line
The 4% rule is still a useful starting framework for thinking about how much you need to save for retirement. Using 25 times your expected annual expenses as your savings target is a solid benchmark for most people planning a traditional retirement around age 65.
For people planning early retirement or with particularly long time horizons, adjusting to 3.5% (which implies saving 28 to 29 times expenses) adds meaningful safety margin. The difference in required savings between 4% and 3.5% is not trivial — it adds roughly 15% to your savings target — but it provides additional cushion against uncertainty.
In practice, flexible spending in retirement is the most powerful risk management tool. Retirees who can reduce discretionary spending by 10% to 15% during poor market years extend the life of their portfolio dramatically. The 4% rule assumes rigid, inflation-adjusted withdrawals regardless of market conditions. More flexible spending makes the plan more resilient than any specific percentage.