The 4% Rule
The 4% rule is a retirement guideline that says you can withdraw 4% of your portfolio in your first year of retirement, then adjust for inflation each year, and your money should last at least 30 years.
Where It Comes From
The rule originated from the 1994 "Trinity Study," which tested historical portfolio survival rates across different withdrawal percentages and asset allocations. Researcher William Bengen found that a 4% initial withdrawal rate survived every 30-year period in US market history going back to 1926.
How to Use It
The 4% rule doubles as a quick way to estimate your FI number. If you spend $40,000 per year, you need $1,000,000 (that's $40,000 ÷ 0.04). This is the same as the "25x expenses" shorthand: multiply your annual spending by 25.
The Debate
The FIRE community debates the 4% rule constantly. Critics argue that future returns may be lower than historical averages, that 30 years isn't long enough for someone retiring at 35, and that the original study used a portfolio of US stocks and bonds that may not reflect modern global investing. Many FIRE planners use 3.5% or even 3% for added safety. Others prefer variable withdrawal strategies that adjust spending based on market performance.
The Bottom Line
The 4% rule is a starting point, not gospel. It's useful for estimating your FI number, but your actual withdrawal strategy in retirement should account for your specific timeline, asset allocation, tax situation, and flexibility.
Related Terms
Safe Withdrawal Rate
Your safe withdrawal rate is the maximum percentage of your portfolio you can withdraw each year in retirement without running out of money over your planned time horizon.
FI Number
Your FI number is the total amount you need invested so that your portfolio can sustain your annual spending indefinitely. It's the finish line for financial independence.
Expense Multiple
An expense multiple is your portfolio value divided by your annual spending. If you have $700,000 saved and spend $50,000/year, you're at 14x. Financial independence using the 4% rule requires 25x.
This tool is for educational and informational purposes only. It does not constitute financial advice. Past performance does not guarantee future results. Consult a qualified financial advisor for personalized advice.