The 4% retirement withdrawal rule is a guideline stating that retirees can typically withdraw 4% of their retirement portfolio in the first year of retirement, then adjust that amount annually for inflation, with a high probability of their money lasting at least 30 years.
Origin and research
- Developed by financial advisor William Bengen in 1994
- Later supported by the Trinity Study (1998), which tested various withdrawal rates and asset allocations
- Based on historical market performance data from 1926 onward
- Assumes a diversified portfolio of approximately 50-60% stocks and 40-50% bonds
How the 4% rule works in practice:
- First year: Withdraw 4% of your initial retirement balance
- Subsequent years: Adjust the previous year’s withdrawal amount for inflation
- Example: With a $1 million portfolio, withdraw $40,000 in year one. If inflation is 2%, withdraw $40,800 in year two, regardless of market performance
Strengths of the 4% rule:
- Simple to understand and implement
- Provides predictable income throughout retirement
- Historical testing shows high success rates (90%+) for 30-year retirement periods
- Conservative enough to withstand most market downturns
Limitations and criticisms:
- Current market conditions: Low bond yields and high equity valuations may reduce future returns
- Inflation risk: Periods of high inflation can significantly increase withdrawal amounts
- Sequence of returns risk: Poor market performance in early retirement years can deplete portfolios faster
- Inflexibility: The rigid withdrawal schedule doesn’t adapt to changing market conditions or personal needs
- Potentially too conservative: May result in significant unused assets for many retirees
Modern adaptations and alternatives:
- Dynamic withdrawal strategies: Adjusting withdrawal rates based on market performance
- Floor-and-ceiling approach: Setting minimum and maximum withdrawal amounts
- Guardrail method: Increasing or decreasing withdrawals based on portfolio value relative to initial value
- Required Minimum Distribution (RMD) method: Using IRS distribution tables to determine withdrawals
- Bucket strategy: Dividing assets into short-term, medium-term, and long-term buckets
The 4% rule provides a useful starting point for retirement planning, but it shouldn’t be applied rigidly without consideration of your unique circumstances. Factors such as retirement length, asset allocation, other income sources, expected expenses, and willingness to adjust spending can all influence the optimal withdrawal strategy. Many financial advisors now recommend more flexible approaches that adapt to changing market conditions and personal needs throughout retirement.