The 4 Percent Rule: What You Need to Know

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Determining your annual retirement expenses and savings goals can be difficult when you still have several years left to work.

To make the planning process easier, many retirement planners and retirees use the 4% rule to estimate their yearly retirement withdrawal rate.

Here is a closer look at how the 4% rule works and if it’s the best retirement strategy for your planning needs.

What is the 4 Percent Rule?

The 4% rule projects that you will withdraw up to 4% of your retirement savings for expenses during your first year of retirement. Then, you adjust the amount to account for inflation each year after that.

This safe withdrawal limit can help you save up to 30 years of cash reserves. 

Financial planner William Bengen is credited as the rule’s inventor. Financial advisors have been using it for approximately 30 years. 

In the original rule, Mr. Bengen’s model investment portfolio included 60% large-cap stocks and 40% intermediate-term Treasury bonds.

You can get exposure to both asset classes by investing in index funds, target-date retirement funds, or adopting a three-fund portfolio.

In a more recent Barron’s interview, Bengen recommended having some exposure to small-cap stocks. He also revealed that retirees may need to withdraw as much as 4.5% per year to afford retirement. 

In most instances, the 4% rule can help make sure you don’t outlive your savings. However, you may need to adapt your investment strategy to the current market conditions.

4 Percent Rule Example

The 4% rule is easy to calculate. You simply plan on withdrawing up to 4% of your retirement savings each year.

To estimate how much you can withdraw each year using the 4 percent rule, use this formula:

Retirement savings balance x 4% (0.04) = Your annual withdrawal limit 

For example, if you have a $1 million nest egg, you can withdraw up to $40,000 in your first year of retirement.

Formula: $1,000,000 x 0.04 = $40,000

You will need to repeat this calculation each year since your portfolio value will change. 

If you anticipate annual retirement expenses to remain below the 4% calculation, you might be ready to retire.

The 4 Percent Rule and Inflation

Inflation will require you to increase your year-over-year withdrawals to keep up with rising costs. Thankfully, it can be easy to calculate your next year’s withdrawal using the current inflation rate.

Let’s say the current inflation rate is 3%, and you withdraw $40,000.

You can multiply your current annual withdrawal amount by 1.03 to calculate a 3% increase.

$40,000 x 1.03 = $41,200

For planning purposes, you will need to withdraw $41,200 to cover the same expenses that $40,000 currently covers.

For a different rate of inflation, simply replace the third numeral with the correct number. As an example, a 5% increase is 1.05.

You will also need to track your current portfolio value to determine if your investment growth keeps up with inflation and expenses. 

Rule of 25 vs. 4 Percent Rule

Another retirement planning rule that can make it easy to decide how much you need to retire is the Rule of 25.

The 4% rule recommends the maximum amount you should spend in relation to your current retirement savings balance.

With the Rule of 25, you multiply your estimated annual expenses to determine how big your nest egg should be.

Annual expenses x 25 = Total retirement portfolio value necessary

So, if your annual spending is $40,000, you need $1 million.

$40,000 x 25 = $1,000,000

Either financial rule can help you create your savings goals and indicate when you can afford retirement. 

When Should You Use the 4 Percent Rule?

Here are some instances when the 4% rule can help you plan for retirement.

Determining Your Annual Withdrawal Rate

Being able to easily plan your annual withdrawal amount can be the best reason to use this rule.

The 4% rule can help you quickly estimate a safe withdrawal rate during retirement.

If the rule suggests you withdraw up to $40,000 per year, that means your average monthly expenses are $3,333. 

You can efficiently determine if your estimated monthly expenses are above or below a 4% withdrawal rate.

If your expenses are higher than your withdrawals, you will need to increase your retirement account balance to reduce your withdrawal rate to 4% or less.

Accommodating for Inflation

You can maximize this rule by withdrawing 4% in the first year and then base your future withdrawals on the annual inflation rate.

Inflation varies from year to year. Some fixed-withdrawal retirement strategies may not account for inflation, and you may only find out later that you withdrew more than your original calculation.

Using a 60/40 Asset Allocation

The rule assumes your retirement portfolio holds 60% stocks and 40% bonds. 

This is a popular asset allocation strategy, and several robo-advisors can automatically build this portfolio with index funds for minimal fees.

Your preferred asset allocation may vary slightly from the 60/40 target. However, you will still hold more stocks than bonds.

A 60/40 portfolio can help you enjoy the growth potential of stocks and earn recurring investment income from bonds. 

Keep in mind that this portfolio has moderate investment risk but may be too aggressive for the most risk-averse retirees.

Utilizing a Roth Retirement Plan

Using a Roth IRA and a Roth 401k lets you make tax-free withdrawals in retirement. 

Not having to pay income taxes on your retirement distributions minimizes your retirement expenses.

As a result, it’s easier not to exceed the 4% withdrawal target because of higher-than-anticipated expenses, including taxes.

When is the 4 Percent Rule the Wrong Choice?

There are some instances when this retirement strategy isn’t beneficial.

Variable Expenses and Investment Returns

Predicting the future is difficult, even if you have a crystal ball.

You will need to factor these variables into your retirement strategy:

  • Inflation
  • Unexpected bills
  • Taxes
  • Stock market returns
  • Fixed income yields

Retirement calculators like NewRetirement can help you simulate optimistic and pessimistic assumptions for many income and cost factors.

This retirement simulation can better estimate your safe withdrawal rate depending on your retirement age and nest egg balance.

Read our NewRetirement review to learn more about interactive retirement planning.

You’re Going to Retire Early

Ideally, this rule can help you have up to 30 years of retirement savings. If you retire at age 65, you may have enough cash to withdraw 4% through age 95.

However, if you’re retiring early, your annual expenses may require a different withdrawal rate so you don’t outlive your money. 

Depending on your circumstances, your initial withdrawal rate might be higher than that of a traditional retiree. For instance, maybe you plan to travel before receiving retirement benefits like Social Security

Some of the reasons for withdrawing more money include:

  • Having a smaller retirement balance due to working fewer years
  • Wanting your retirement balance to last longer than 30 years
  • Anticipating above-average expenses in your first years of retirement

Several factors influence how much money you want to save before retiring and how much you will spend each year in retirement.

The 4% rule of thumb is a great baseline even for early retirees. That said, you might need to use other retirement calculators to estimate your minimum savings and safe withdrawal rates.

You Will Work Part-Time

Each retiree spends their retirement years differently. You may decide to get a part-time job doing something you enjoy to stay active and also earn some extra cash.

Your recurring paychecks will help pay the monthly bills, so you don’t depend entirely on your retirement accounts.

Consequently, your withdrawal rate may be less than 4% while you continue to work and keep your expenses low.

If you have a sufficient retirement balance, working increases the probability that your nest egg lasts longer than 30 years. 

While it’s better to have too much money than not enough in retirement, you might be able to comfortably withdraw more than 4% without running out of money. 

Or, you may unnecessarily keep your expenses low because you adopt a withdrawal plan that is too conservative. 

Pros and Cons

Here is a closer look at the advantages and disadvantages of the retirement withdrawal strategy.


  • Quickly project your annual retirement budget
  • Retirees have been using this rule for 30 years
  • Invest in stocks and bonds with a balanced risk tolerance
  • Consider inflation to calculate future withdrawal amounts


  • Relies on low inflation and consistent investment growth
  • Low investment returns increase the risk of excess withdrawals 
  • Small account balances will have a higher withdrawal limit
  • Variable living expenses and taxes can require larger withdrawals

Alternatives to the 4 Percent Rule

Here are several other retirement withdrawal strategies you might want to try.

Fixed Dollar Withdrawals

You may prefer the simplicity of a fixed-dollar retirement plan. With this strategy, you withdraw a flat amount of money each year. 

For example, you can withdraw $40,000 annually with a $1 million portfolio for up to 25 years.

Formula: Total portfolio value / annual expenses = Number of withdrawal years

This strategy can quickly help you decide the maximum amount you should withdraw depending on how many years you plan to use your account.

You might also use this strategy if you can primarily live on your required minimum distributions (RMDs) from your tax-deferred traditional IRA and 401k accounts


  • You don’t have to calculate variable percentages
  • Estimate the average withdrawal amount by your planned life expectancy


  • Difficult to calculate inflation
  • Future expenses might be higher than your project

Fixed Percentage Withdrawals

Another option is to withdraw a flat percentage each year that can be higher or lower than the 4% rule. You may also be able to adjust future withdrawals as the inflation rate changes.

This can be a good strategy if you reinvest the dividend income or work part-time, so you don’t need to sell your investment positions. 

Maintaining the same starting balance allows you to withdraw the same percentage each year.

You may need to increase your withdrawal rate if you cannot reduce your retirement expenses proportionally as you sell your principal.

For example, $40,000 is 4% of $1 million but 4.17% of a $960,000 balance. You will also need to assume that inflation will increase your annual expenses.


  • It can be more straightforward to calculate than the 4% rule
  • The withdrawal rate doesn’t increase if you don’t sell investments


  • Might need to increase the withdrawal rate as the portfolio balance decreases
  • May not calculate inflation into future withdrawal rates

Live On Annual Investing Income

If you have a high liquid net worth, you can live on the interest when you earn sufficient passive income. 

For example, you can satisfy the 4% rule with a $1,000,000 portfolio if the annual investment return is at least $40,000. 

You can spend the monthly distributions as they are deposited into your bank account and sell the price appreciation from your stock positions.

Holding high-yield investments can make this withdrawal strategy easier to achieve. However, above-average yields can indicate more investment risk.

If the actual investment performance is below the projected performance, you may need to sell investments to fill the funding gap. Another possibility is getting a side hustle to help you avoid needing to sell your assets.

The latter option can be better if you retire early and are willing to exchange your time for money so you don’t have to reduce your quality of life in retirement.


  • Don’t have to sell your investment principal in early retirement years
  • Passive income pays for your entire living expenses


  • May need lower living expenses to offset low returns
  • Annual investment performance can vary


While the 4% rule isn’t perfect, it’s an easy and accurate way to estimate how much you can spend in retirement to avoid outliving your savings.

You can easily change your retirement goals to save more money or reduce your monthly expenses if you require a higher withdrawal rate. 

Also, look for ways to effortlessly earn monthly income and maintain a consistent withdrawal rate once you finalize your retirement strategy.