4% rule

The 4% rule comes from research published by the US financial planner William Bengen in 1994, later supported by the so-called Trinity study. Using historical US stock and bond returns, Bengen found that a retiree who withdrew 4% of the starting portfolio in the first year, then raised that cash amount each year in line with inflation, would not have run out of money within 30 years in any historical period he tested, holding roughly half to three-quarters in shares. The key detail is that the percentage is applied only once, to the starting value; after that, withdrawals follow inflation, not the portfolio.

The rule is a starting point, not a guarantee. It rests on US market history, which was unusually strong; studies of many other countries’ markets found lower safe rates. It assumes fixed spending, ignores fees and taxes, and was tested over 30 years, so early retirees with 40 or 50 years ahead may need a lower rate. Its main danger is sequence-of-returns risk: poor returns early in retirement do far more damage than the same returns later. Many retirees use flexible approaches instead, cutting spending after bad years. Turned around, the rule gives the FIRE movement’s target of saving about 25 times annual spending.