The 4% rule and how much you need to retire

What is the 4% rule?

The 4% rule is a rule of thumb for spending savings in retirement. In the first year you take out 4% of what you have. Every year after that you take the same dollar amount, raised by inflation, whatever the market did. Looking back over U.S. market history, a portfolio of stocks and bonds run this way lasted at least 30 years.

The amount you take out each year is your withdrawal, and the first year’s withdrawal as a share of your savings is your withdrawal rate. A safe withdrawal rate is the highest rate that would have lasted through the worst stretch of history being tested. For a 30-year retirement in U.S. data, that came out at about 4%.

How much do I need to retire?

Divide the yearly spending your savings must cover by your withdrawal rate. At 4% that is the same as multiplying by 25, which is why the 4% rule is also called the 25x rule.

Two things make this target easier to use. Put spending in today’s dollars: what life costs now, not what it will cost in 30 years, so the target is in today’s dollars too. And count only what savings must cover: any steady income you expect from elsewhere comes off the spending first.

When will your savings reach your number?

Set the spending and withdrawal rate in the gold box to get your target. Then fill in what you have, what you put in each month and how much you raise it each year, and the calculator shows the year your savings cross the target (the dashed line).

The target is in today’s dollars, so the growth has to be too. Use a return after inflation (a real return): about 4% a year if you plan on 7% before inflation and 3% inflation. Use a raise above inflation: if your deposits only keep pace with prices, enter 0%. 7% before inflation is a cautious planning figure for a stock-heavy portfolio, not a promise. The S&P 500 with dividends compounded about 10.0% a year from 1928 to 2025 before inflation, but returns swing a lot from year to year and the future can be worse.

How much do I need to retire on $40,000, $60,000 or $100,000 a year?

Multiply the yearly spending your savings must cover by 25 at 4%, by about 28.6 at 3.5%, by about 33.3 at 3%, or by 20 at 5%. Here is the result for common amounts:

Every $10,000 a year of spending you do not need from savings takes $250,000 off the target at 4%. That is why cutting a recurring cost, or finding steady income from elsewhere, moves a retirement date more than almost anything else.

How long will my money last in retirement?

It depends on two numbers: how much you take out each year as a share of what you started with, and what the rest earns after inflation. With no growth at all, the answer is simple division: at 4%, $1,000,000 pays $40,000 a year for exactly 25 years.

With growth, the table below shows how many full years of withdrawals $1,000,000 pays. Withdrawals are the same in today’s dollars every year and come out at the start of the year; the rest grows at a steady real return.

At 4%, the money lasts 25 years with no real growth, 34 years at 2% after inflation, and 44 years at 3%. At 6%, even a 5% real return only stretches it to 32 years. Real markets do not deliver a steady return, so treat this table as the average case, not the worst one.

In Excel or Google Sheets, =NPER(2%, -40000, 1000000, 0, 1) returns 34.0 years: a 2% real return, $40,000 out each year, $1,000,000 to start, nothing left at the end, and the final 1 for withdrawals at the start of each year. If NPER returns an error, the money never runs out at that rate.

Where does the 4% rule come from?

From two studies of U.S. market history in the 1990s. Neither predicts the future; both ask what would have worked in the past.

Bengen, 1994

Financial planner William Bengen published “Determining Withdrawal Rates Using Historical Data” in the Journal of Financial Planning in October 1994. He tested retirements starting in every year from 1926, with a portfolio rebalanced to 50% stocks and 50% intermediate-term Treasury notes, a first-year withdrawal set as a percentage of the balance, and that dollar amount raised for inflation every year after. His bar was at least 30 years of withdrawals.

A 4% first-year withdrawal cleared it: in no past case did it run the portfolio out in under 33 years, and in most cases it lasted 50 years or more. At 4.25%, the money could run out in as little as 28 years. He suggested holding between 50% and 75% in stocks.

The Trinity study, 1998

In February 1998 the AAII Journal published “Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable” by Philip Cooley, Carl Hubbard and Daniel Walz, often called the Trinity study. It used stock and bond returns from 1926 to 1995 (the S&P 500 for stocks, long-term high-grade corporate bonds for bonds) and tested withdrawal rates over 15, 20, 25 and 30 years, with and without inflation increases.

With withdrawals raised for inflation, it found 3% to 4% rates still produced high success rates for portfolios mostly in stocks, while rates above 7% did poorly over every period. It concluded that early retirees expecting long payout periods should plan on lower rates, and that most retirees would likely benefit from at least 50% in stocks. In a 2011 follow-up, the same authors said people raising withdrawals for inflation should plan on initial rates in the 4% to 5% range.

What is sequence of returns risk?

It is the risk that bad years arrive early in retirement, while you are taking money out. Losses early on force you to sell more of what you own at low prices, and what you sold is not there for the recovery. The same returns in a different order can leave you rich or broke.

This is the risk the 4% rule was sized for. In Bengen’s 50/50 tests, the shortest-lasting retirements were the ones hit by the 1973–1974 market slump, which he describes as a severe stock decline combined with high inflation. The usual defenses are holding enough bonds and cash to cover a few years of spending so you do not sell stocks at the bottom, and being willing to spend a little less after a bad year.

Is the 4% rule still valid?

As a starting point, yes; as a guarantee, no. It is a summary of what worked in one country’s past, over 30 years, with particular mixes of stocks and bonds. Keep these limits in mind:

• It sits close to the edge. In Bengen’s data, 4% lasted at least 33 years, but 4.25% could fail in 28. There is not a wide margin built in.
• It is for about 30 years. Longer retirements call for a lower rate, as the 1998 study said.
• The future can be worse than the past. Lower returns after inflation shorten every row of the table above.
• Costs come off the top. A 1% yearly fee comes out of the return, which is like moving one column to the left in the how-long table.
• Real people adjust. Few retirees raise spending by inflation in a crash. Spending a little less after bad years makes any withdrawal rate safer.

3% vs 4%: what changes if you plan more cautiously?

A lower withdrawal rate needs a bigger target and buys a longer cushion. For $40,000 a year:

• At 4%: a $1,000,000 target. With no real growth at all, it lasts 25 years.
• At 3%: a $1,333,333 target, a third more. With no real growth, it lasts 33 years; at 2% after inflation, more than 50.

The cost is time or savings. Reaching $1,333,333 instead of $1,000,000 in 30 years at 4% after inflation takes about $1,921 a month instead of about $1,441. In the calculator example above ($20,000 saved, $1,000 a month raised 1% a year), the target arrives in year 39 instead of year 33. Some people plan on the lower rate and treat anything better as a bonus; others plan on 4% and keep the option to spend less after a bad year. Try both in the calculator.

How much do I need to save each month to retire?

Use the payment formula with a return after inflation, and the target in today’s dollars. At 4% after inflation, reaching $1,000,000 in 30 years from zero takes about $1,441 a month.

Monthly amounts from zero, at 4% after inflation, targets at a 4% withdrawal rate, all in today’s dollars. Money already saved lowers them: with $100,000 invested today, $1,000,000 in 25 years takes about $1,417 a month instead of about $1,945. Deposits that rise with your pay can start lower, which is what the calculator above shows.

How does the Freedom calculator use the 4% rule?

Bill Router’s Freedom calculator runs this whole guide on your own numbers. Its freedom number is your yearly spending in today’s dollars divided by your withdrawal rate, which is 4% unless you change it under Assumptions. $40,000 a year gives a freedom number of $1,000,000.

It then grows what you invest each month, from your budget and from card rewards, raised each year with your pay (3% by default), at 7% a year before inflation. Each year it compares the balance with your freedom number raised by 3% inflation, so the comparison is fair, and it shows the age you first reach it. If that is later than your target age, it tells you how much more a month would get you there. In expert mode you can add extra monthly savings and lump sums at any age, see what other income goals would take, and test other returns.

Common mistakes

• Taking 4% of the balance every year and calling it the 4% rule. The rule sets the first withdrawal at 4%, then follows inflation. Recomputing 4% each year is a different plan, with income that swings with the market.
• Mixing today’s dollars and future dollars. A target in today’s dollars needs a return after inflation. Grow savings at 7% toward a target in today’s dollars and you will think you are years closer than you are.
• Using it for a 45-year retirement unchanged. The tests were for about 30 years. Longer needs a lower rate.
• Counting all spending against savings. Subtract steady income from elsewhere first; the target falls by 25 times that income.
• Treating the result as a promise. It is a rule of thumb from history. Review it every few years and adjust spending if the first years go badly.