What the heck is the 4% rule?

Simply put it’s a good guide as to how much a retiree can withdraw from investments, keep up with inflation and not run out of money during retirement. The rule has it critics, but it still remains a good guide for most people.

Let’s say you determine that to maintain your lifestyle in retirement you need $60,000 a year income. Social Security will provide some of that for most people and for a relatively few there will be a pension. The 4% rule will be applied to the amount you need from investments after considering other sources of steady income.

Let’s say the $60,000 actually is $45,000 net of other sources. To generate that $45,000 for life in retirement (defined as about 30 years), you need to start with $1,125,000 in investments. The 4% rule assumes 60% invested in stocks and 40% in bonds.

So, in the first year you withdraw $1,125,000 X 4% or $45,000. In subsequent years you withdraw $45,000 plus inflation. Let’s say inflation is 2%. In the second year you withdraw $45,000 plus another $900. (2% of $45,000). The $45,000 is a constant, the inflation amount variable.

You can withdraw less if circumstances permit, but if you withdraw more, you put your plan at risk.

If you receive cash dividends or interest from your investments they should be calculated as part of you regular withdraw, not additional.

Beginning at age 73 required minimum distributions RMDs from IRAs, 401k plans, etc. exceed 4% and increase each year thereafter. If the RMD should exceed the amount called for by the 4% rule, including the inflation adjustment, you may want to reinvest the difference so your plan stays on track. That extra could be part of an emergency fund.

If you are more conservative with investments and put less in stocks, the rule will not work. If you retire early beyond a 30 year or so life expectancy, the rule will not work.

The 4% rule is calculated to cover a long retirement. If you look at actuarial tables you will see life expectancy at age 65 is eighteen years for men and 20.6 for women. The 30 year assumption is a cushion and after all, many people will live beyond those average twenty years. Running out of money ten years before the end ain’t good.


  1. The less obvious thing with the 4% rule is: IF your investments rate of return (ROR) is greater than 4% and you do not withdraw extra for inflation, you’ll never touch your principal investment. For example if you have $1,000,000 and withdraw 4% ($40,000) and get a ROR of 6% (on average) on the remainder, you will have $1,017,600 at the beginning of the next withdraw year. The difference between your ROR and withdraw can cover roughly the inflation rate or in this case about 2%. If you did not withdraw more than 4% over those 30 years you would over $1.6m in principal based on 6% ROR. 4% would now be about $66k in year 30 withdraw.

    Fidelity Investments put out in the last year to expect a ROR of 5.29% for a portfolio of 60/40. If you were in straight stocks you might hope for between 6 to 8% depending who you listen to. But as long as your investments earn more than 4% you can guarantee at least a set amount of income without touching the principal.

    If you can afford to stick to 4% without adjusting for inflation or medical expenses for the first 20 years and then start withdrawing just what you need to cover your inflationary costs, you just might run out of sunrises before your run out of money.

    It is also interesting to note some investment advisers were suggestion withdrawing only 3% because of the low bond ROR and CD rates over the last decade.

    The 3% and 4% rule works for whatever amount of money you did manage to save. It doesn’t have to be a million dollars. $250k still gives you an extra $10K per year so it is no excuse not to save. Every dollar will count 30 years from now and $10K is better than nothing.


    1. Good in theory but the average 6% return doesn’t mean much if you have a few years less than 4% or even a negative year.


      1. The theory works in the long term (30 yrs) because you will more than likely not touch the principal and as long as you maintain your withdraw rate at 4% for the long term, you will still have a good size pot to withdraw from because in the long term the ROR will average more than 4%.

        True some years you might have a negative return like last year. I have also had a year of 20%. Also you might not get the $40k if you have multiple bad ROR years. The question would be how tight are your expenses. If you are using that money for extras like replacing a car or taking vacations, that is an easy adjustment to make to stay on track. If you need the money for the essentials, then you might run out of money in 30 years which is only a problem if you beat the odds of a longer than average life.

        But for planning purposes, I have not found anything better “to guess” how much to save or how far you can stretch what you already have. Excel spreadsheets are great at seeing how just a little adjustments can help you or hurt you The 4% rule gives hope if you have any amount saved. Causes despair if you can’t reach some magic number and people to give up on saving.

        I’ll be glad to write a spreadsheet for anybody who doesn’t know how. Just leave a comment.


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