The 4% Rule — How Much You Can Safely Withdraw

Imagine you have already built the portfolio you worked years for. The question that comes right after "how much do I need" is far more insidious: how much can you withdraw each year without the money running out before you do? Withdraw too much and you risk being left with nothing at 75. Withdraw too little and you deprived yourself for nothing.

The most famous attempt at an answer is the 4% rule. This article explains what exactly it says, where it comes from, and — just as important — where it stops holding. With no promises of returns and no "buy/sell" signals. Just the mechanism and its assumptions.

What the rule actually says

The 4% rule is subtler than it sounds. It does not say "withdraw 4% of the portfolio's current value every year." It says something else:

• In the first year you withdraw 4% of the initial portfolio.
• Each following year you withdraw the same amount in real money, adjusted upward for inflation — regardless of whether the market rose or fell.

Example: with a portfolio of €600,000 you withdraw €24,000 in the first year. If inflation is 3%, the next year you withdraw €24,720, even if the portfolio has temporarily sunk. The idea is for your standard of living to stay constant rather than jump around with the market.

The researchers' historical conclusion is that such a withdrawal has lasted 30 years and more in US market data without the portfolio running dry. The key words are "historical" and "US" — we will return to them.

The flip side: the 25× number

If you can withdraw 4% a year, then your target portfolio is simply the inverse of that percentage:

FIRE number = Annual expenses ÷ Withdrawal rate = Annual expenses × 25

• Annual expenses — how much you spend on one year of living (not how much you earn).
• Withdrawal rate — here 4%, that is 0.04.
• Since 1 ÷ 0.04 = 25, the 4% rule is the same as the "25 times annual expenses" rule.

That is why your expenses determine the target twice over. If you spend €24,000 a year, you need €600,000. If you cut expenses to €18,000, the target drops to €450,000 — and at the same time you have more left to save. That is exactly why the savings rate is such a powerful lever, as we saw in retiring at 40 in Bulgaria.

Where the rule comes from

The 4% rule is not a law of nature but an empirical finding from two classic works.

The first is by financial adviser William Bengen. In 1994 he studied historical US data and asked: what is the highest initial withdrawal rate that would last 30 years across every period in the past, including the worst ones? The answer he found was about 4% for a portfolio split between stocks and bonds.

The second is the so-called Trinity Study from 1998 — three professors from Trinity University (Cooley, Hubbard, and Walz) test the idea through a "success rate": for what share of historical periods the portfolio survived to the end of the horizon. The results confirm that a withdrawal of around 4% has a very high success rate over a 30-year horizon.

The important thing is to understand what this methodology does: it looks back at a specific history (mainly American, during the 20th century) and assumes that the future will resemble it closely enough. That is reasonable, but not a guarantee.

How much the difference in rate changes

A small change in the withdrawal rate shifts the target portfolio dramatically, because you are dividing by an ever-smaller number:

In other words, moving from 4% to the more cautious 3.5% is not a minor adjustment — it raises the required portfolio by about €86,000. But it buys a significant margin of peace of mind, especially over a very long horizon.

Calculate your own case

Check what portfolio you need and when you reach it in the FIRE calculator. The example starts from 35 years of age, €50,000 in savings, a €20,000 annual contribution, a 7% return, and €24,000 in annual expenses at a 4% withdrawal.

Then try changing just the withdrawal rate from 4 to 3.5 — you will see how the target and the years shift. That very exercise shows why the conservative rate has a cost, but also a value.

Caveats that make the difference

The 4% rule is a useful starting point, but it was born under specific assumptions. Here is where to be careful:

• The data is American. The studies rest on the history of the US market during the 20th century — a period of exceptional growth. Other markets and other decades may look different. Do not take 4% as a universal constant.
• Sequence-of-returns risk. The average return is not everything — it matters when the weak years arrive. If the market crashes in the early years of withdrawal, you sell assets at low prices and the portfolio may not recover, even if the average return afterward is good. That is why the first 5–10 years of retirement are the most fragile.
• Early retirement = a much longer horizon. Bengen and Trinity test 30 years. If you retire at 40, you may need 50 years. For such a long period, a more cautious withdrawal of around 3–3.5%, rather than 4%, is safer.
• Asset allocation matters. The rule assumes a diversified portfolio of stocks and bonds, not just cash or a single stock. See asset allocation.
• Flexibility helps. People who reduce their withdrawals in bad years (or earn a little extra income) hold up much better than those who withdraw mechanically.

What this does NOT mean

• It does not mean that 4% is guaranteed safe forever. It is a historical probability, not a promise.
• It does not mean you must withdraw exactly 4% — for a very early retirement, less is wiser.
• It does not mean that once you reach the number, you stop thinking. Inflation, taxes on investment income, and health-care costs keep running even after you stop working.
• And most importantly: this is an educational model, not personal financial advice. Your situation — income, family, health, horizon — may call for an entirely different number.

One practical way to think about the withdrawal phase is through the cash flow the portfolio generates on its own — dividends and coupons — rather than only through selling assets. More on that in passive income from dividends.

Sources

• Bengen, W. (1994). "Determining Withdrawal Rates Using Historical Data." Journal of Financial Planning. The original study, which derives the roughly 4% rate from historical data.
• Cooley, P. L., Hubbard, C. M. & Walz, D. T. (1998). "Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable." Trinity University (known as the Trinity Study). Confirms the high success rate over a 30-year horizon.

Continue reading

• Retiring at 40 in Bulgaria — how the 4% rule sets the FIRE number in practice.
• Coast FIRE and Barista FIRE — gentler paths if the full number seems far off.
• Asset allocation — the mix the 4% rule silently assumes.
• Passive income from dividends — withdrawal through cash flow, not only through sales.
• Investing for beginners — if you are still building the foundation.

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