The 4% rule, and where it falls short

If you've read anything about FIRE, you've met the 4% rule. It's the reason so many people say you need "25 times your spending" to retire.

It's a useful rule. It's also often stretched further than the research behind it. Here's where it came from, what it does and doesn't say, and how people build in room for the parts it can't predict.

This is general education, not advice. Past market returns don't guarantee future ones. Please check withdrawal and tax decisions with a licensed professional.

Where the rule came from

Bengen, 1994

In October 1994, financial planner William Bengen published "Determining Withdrawal Rates Using Historical Data" in the Journal of Financial Planning (read the paper).

He asked a practical question: if a client retires and takes out a set amount in year one, then raises it with inflation every year after, how much can they take without running out?

Instead of assuming smooth average returns, he replayed actual history: large-company U.S. stocks, intermediate-term U.S. Treasury bonds and inflation, starting a new "retiree" in each historical year. His conclusion: "Assuming a minimum requirement of 30 years of portfolio longevity, a first-year withdrawal of 4 percent, followed by inflation-adjusted withdrawals in subsequent years, should be safe."

He also found that portfolios holding roughly 50% to 75% stocks worked best in his tests; much less or much more stock did worse.

The Trinity study, 1998

Four years later, three professors at Trinity University, Philip Cooley, Carl Hubbard and Daniel Walz, published "Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable" in the AAII Journal (read the article).

They used stock and bond returns from 1926 to 1995 and tested withdrawal rates from 3% to 12%, over payout periods of 15, 20, 25 and 30 years, across mixes from all stocks to all bonds. They reported the share of historical periods in which each portfolio lasted.

Two of their cautions matter most for FIRE:

• Longer retirements call for lower withdrawal rates. The authors noted that people expecting a longer payout period should plan to withdraw less.
• Inflation adjustments cost something. Raising withdrawals with inflation, as most retirees want to, requires a lower starting rate than keeping withdrawals flat.

How the math turns into "25 times"

If 4% of your savings covers a year of spending, then your savings need to be 25 times that year's spending (1 ÷ 0.04 = 25).

A made-up example: spending of $60,000 a year means a target of about $1.5 million. In year one you'd take $60,000. If inflation ran 3% that year, year two's withdrawal would be $61,800, regardless of what the market did.

That last part is important. The classic rule doesn't look at your balance after year one. It simply follows inflation. That's what makes it easy to understand, and also what makes it rigid.

Limit 1: Early retirements can be much longer

Bengen's charts tracked how long portfolios lasted out to 50 years, but his 4% recommendation assumed a minimum of 30 years. The Trinity study stopped at 30 years.

Someone retiring at 65 might reasonably plan for 30 years. Someone stepping away at 40 could need their money to last 50 or more. The 4% figure wasn't set for that, and the Trinity authors' own advice points the same way: the longer the horizon, the lower the safe rate.

That's why many early retirees plan around a lower starting rate, keep the option to earn some income, or both.

Limit 2: Sequence-of-returns risk

Two retirees can earn the same average return over 30 years and get very different results. What matters is the order.

Imagine (made-up example) two people who each retire with $1 million and take $40,000 the first year:

• Retiree A gets a big market drop in years one and two, then strong years later.
• Retiree B gets the strong years first and the drop much later.

Retiree A is selling investments to pay the bills while prices are low. Those shares are gone and can't recover when the market does. Retiree B is withdrawing from a portfolio that has already grown. Same average, very different ending.

This is called sequence-of-returns risk, and it's the main reason the first five to ten years of retirement matter so much.

Limit 3: The real world has costs the studies don't

The historical returns in these studies are market returns. Real portfolios differ:

• Fees. Fund expenses and other investment costs can reduce returns. Money paid in fees isn't available to spend. See Index investing basics for how to find a fund's expense ratio.
• Taxes. Withdrawals from pre-tax accounts such as a traditional 401(k) or IRA are generally taxed as income. Your 4% may not all be spendable.
• Behavior. Selling in a panic, or chasing hot investments, can do more damage than any withdrawal rate.
• Spending isn't flat. Real spending moves around: a roof, a car, a wedding, a health problem.

Limit 4: History is not a forecast

Both studies used U.S. history, which was a strong century for U.S. markets. Future returns, inflation and interest rates may be better or worse. A rule that worked in every past period can still be tested by a future one.

How people build in flexibility

None of this means the 4% rule is useless. It means many people treat it as a first draft. Common ways people add room:

• Plan on a lower starting rate when retirement could be long, or keep a cushion above their number.
• Adjust spending with the market. Skip the inflation raise after a bad year, or trim travel until the portfolio recovers.
• Keep some income. A little consulting, part-time work or a side business in the early years takes pressure off the portfolio right when sequence risk is highest. That's the idea behind Barista FIRE; see FIRE basics.
• Count future income. A pension or Social Security can cover part of spending later. Social Security retirement benefits can start as early as 62, but at a permanently reduced amount; for people born in 1960 or later, full retirement age is 67 (SSA).
• Keep a cash buffer. Some retirees hold a year or two of spending in cash so they aren't forced to sell investments in a slump.
• Plan health insurance separately. It's one of the biggest early-retirement costs. See Health insurance before Medicare.

So, is 4% "safe"?

It's a well-researched starting point for a 30-year retirement with inflation raises, based on U.S. history. It isn't a promise, and it wasn't set for a 50-year retirement with zero flexibility.

The more of your spending you can cover with steady income, and the more willing you are to adjust in bad years, the less any single percentage has to carry.

Next step

See what 25 times your spending looks like, then try the same math with a lower withdrawal rate to see how much cushion it adds.

Find your FIRE number →