The 4% rule says you can withdraw 4% of your starting portfolio each year (adjusted for inflation) and likely not run out of money over 30 years. It's the most widely cited retirement spending benchmark — but modern research suggests dynamic strategies that adapt to markets perform significantly better.
The safe withdrawal rate — commonly known as the 4% rule — is one of the most widely cited guidelines in retirement planning. It suggests that a retiree can withdraw 4% of their initial portfolio balance in the first year of retirement, then adjust that dollar amount for inflation each subsequent year, with a high probability of not running out of money over a 30-year period.
How It Works
The rule was derived by financial planner William Bengen in his landmark 1994 study. Bengen tested every possible 30-year retirement period using historical U.S. stock and bond returns (dating back to 1926) and found that a 4% initial withdrawal rate survived even the worst historical periods — including the Great Depression and the stagflation of the 1970s.
The mechanics are simple:
- Multiply your starting portfolio by 4% to determine your first-year withdrawal
- Each subsequent year, increase the withdrawal amount by the rate of inflation
- The withdrawal amount is fixed in real (inflation-adjusted) terms, regardless of portfolio performance
For example, with a $1,000,000 portfolio:
- Year 1: withdraw $40,000
- Year 2 (with 3% inflation): withdraw $41,200
- Year 3 (with 2.5% inflation): withdraw $42,230
Why It Matters
The 4% rule provides a critical benchmark — it answers the fundamental question: "How much can I safely spend each year without running out of money?" It also implies a savings target: you need 25 times your annual expenses to retire (the inverse of 4%).
However, the 4% rule has significant limitations:
- Based on U.S. historical data: international markets have historically delivered lower returns, potentially requiring a lower safe withdrawal rate (3%–3.5%)
- Assumes a fixed 30-year horizon: early retirees (FIRE) or those planning for longevity beyond 30 years may need a lower rate
- Ignores taxes and fees: real-world withdrawals are reduced by tax obligations and investment costs
- Static strategy: it does not adapt to market conditions — you withdraw the same real amount whether markets are booming or crashing
Interactive chart: withdrawal-rate-success
Success rate vs. initial withdrawal rate over a 30-year retirement
Coming soon
Monte Carlo vs Historical Backtesting
Bengen's original study used historical backtesting — testing every actual 30-year sequence of returns. Monte Carlo simulation takes a different approach: it generates thousands of synthetic return sequences from a probability distribution. This allows testing scenarios that have never occurred historically but are statistically plausible.
When tested with fat-tail distributions that capture the true frequency of market crashes, the 4% rule's success rate can drop from ~95% to 85% or lower — a meaningful difference for retirement security.
Dynamic Alternatives
Modern retirement research has moved beyond the static 4% rule toward dynamic spending strategies that adjust withdrawals based on portfolio performance:
- Guyton-Klinger rules: cut spending when withdrawal rates exceed guardrails, boost when below
- Percentage of portfolio: withdraw a fixed percentage of the current value each year
- Floor & ceiling: percentage-based with minimum and maximum bounds
These strategies trade income stability for dramatically improved portfolio survival rates.
Frequently Asked Questions
- Is the 4% rule still valid in 2026?
- The 4% rule remains a useful starting benchmark, but most modern research suggests it may be too aggressive for non-U.S. markets, early retirees with 40+ year horizons, or periods following historically high valuations. Many planners now recommend 3.3–3.5% as a safer starting point, or using dynamic spending strategies that adjust with market conditions.
- What is the 25x rule for retirement?
- The 25x rule is the inverse of the 4% withdrawal rate: you need 25 times your annual expenses saved to retire. If you spend $60,000 per year, you need a $1,500,000 portfolio. This is a rough target — your actual number depends on time horizon, asset allocation, and other income sources.
- Should I use the 4% rule or a dynamic spending strategy?
- Dynamic strategies like Guyton-Klinger or floor-and-ceiling are generally superior because they adapt to market conditions, dramatically improving portfolio survival rates. The trade-off is variable income. The 4% rule is simpler but riskier because it ignores portfolio performance entirely.