The 4% rule explained
The 4% rule says you can withdraw 4% of your savings in your first year of retirement, then raise that dollar amount with inflation each year, and your money should last about 30 years. Flip it around and you get a quick retirement target: save 25 times your yearly spending.
How the 4% rule works
Say you retire with $1,000,000.
- Year 1: withdraw 4%, which is $40,000.
- Year 2: prices rose 3%, so you withdraw $40,000 × 1.03 = $41,200.
- Year 3 and on: keep raising the previous year’s amount by inflation, whatever the market did.
Notice that after the first year, the 4% no longer matters. You’re spending a steady amount of buying power, not a fixed percentage of whatever your balance happens to be.
Where the 4% rule came from
In 1994, financial planner William Bengen tested withdrawal rates against historical US stock and bond returns going back to the 1920s. He found that a first-year withdrawal of about 4%, adjusted for inflation afterwards, lasted at least 30 years in every period he studied, including retirements that started just before the Great Depression and the high inflation of the 1970s. Later studies, including the well-known “Trinity study,” found similar results.
The 25× rule: the same idea, backwards
If 4% of your savings covers a year of spending, you need 100 ÷ 4 = 25 times your yearly spending. That spending is only the part your savings must provide, after Social Security and any pension.
| Yearly income from savings | Savings needed at 4% | Savings needed at 3.5% |
|---|---|---|
| $20,000 | $500,000 | $571,000 |
| $30,000 | $750,000 | $857,000 |
| $40,000 | $1,000,000 | $1,143,000 |
| $60,000 | $1,500,000 | $1,714,000 |
The limits of the 4% rule
- It was built for about 30 years. Retire at 50 and your money may need to last 45 years. A lower rate like 3.25–3.5% gives more room.
- It’s based on the past. Future returns could be lower than the US has historically enjoyed.
- It ignores fees and taxes. A 1% yearly fee eats a big share of a 4% withdrawal. Taxes on traditional 401(k) and IRA withdrawals come out of what you spend.
- It assumes you never adjust. In real life, most retirees can trim spending after a bad year, and that flexibility makes a plan much safer.
- It often leaves money unspent. In most historical periods, retirees following the rule ended up with more than they started with.
How our calculator uses it
Our calculator uses your withdrawal rate (4% by default) to work out your retirement number. If you plan to retire early, open Advanced options and try 3.5%. You’ll see how much more you’d need, and how many years it adds.