The 4% Rule (of Thumb)

Alright, let’s dive into the 4% rule—an absolute game-changer for anyone dreaming of a worry-free retirement! Imagine you’ve built up a juicy nest egg, say $1 million, and now you’re ready to kick back and live your best life. The 4% rule is like your financial superpower: it tells you that you can safely withdraw 4% of your portfolio every year—$40,000 in this case—without running out of money for at least 30 years, no matter what the stock market throws at you. How cool is that?

Withdraw 4% of your portfolio every year without running out of money for at least 30 years!

Here’s the magic behind it: this rule comes from some brilliant number-crunching in the 1990s by a financial planner named William Bengen. He stress-tested it against the wildest market ups and downs—like the Great Depression and the stagflation of the ‘70s—and found that a balanced portfolio (think 50-60% stocks, 40-50% bonds) could handle a 4% withdrawal rate, adjusted for inflation each year, and still keep you in the green for decades. It’s not just a guess—it’s battle-tested financial science!

History

William Bengen

The rule originated with William Bengen's pioneering study in 1994, "Determining Withdrawal Rates Using Historical Data." Bengen’s key finding was that a 4% withdrawal rate (adjusted annually for inflation) was generally "safe" for a portfolio of at least 50% stocks (large-cap U.S. stocks) and the remainder in intermediate-term U.S. Treasury bonds, assuming a 30-year horizon. 

Bengen, in 1997, raised the SAFEMAX initial withdrawal rate to 4.3 percent by adding some more diversification with the inclusion of 30 percent small-caps in the stock portfolio. Bengen boosted the SAFEMAX initial withdrawal rate again to 4.5 percent, in a 2006 book, "Conserving Client Portfolios During Retirement."

Note: Bengen referred to the safe withdrawal rate (SWR) as the SAFEMAX rate.

The Trinity Study

Perhaps the most famous study on SWRs is the Trinity Study conducted in 1998 by three Trinity University professors. Using data from 1926-1995, their finding was that a 4% withdrawal rate succeeded 95%–100% of the time for 30 years with 50%–75% stock allocations. Note that this finding is very similar to Bengen's.

In their 2011 update (using extended data from 1926-2009), the Trinity Study authors concluded:

The sample data suggest that clients who plan to make annual inflation adjustments to withdrawals should also plan lower initial withdrawal rates in the 4 percent to 5 percent range, again, from portfolios of 50 percent or more large-company common stocks, in order to accommodate future increases in withdrawals.

Note: Whereas Bengen used intermediate-term U.S. Treasuries in his work, the Trinity Study authors used high-grade corporate bonds.

Other Researchers

In a 2006 study, authors Guyton and Klinger concluded that a starting withdrawal rate of 5.2%–5.6% could be sustainable over 40 years with a 65/35 stock/bond mix, provided retirees adjusted spending dynamically. Without adjustments, rates dropped closer to 4%. This study included additional asset classes (large cap, small cap, REITs, and international) as well as value and growth factors.

Ongoing research by Michael Kitces suggests that SWRs could range from 3.5% (high CAPE) to 5%+ (low CAPE), with mid-retirement adjustments enhancing sustainability.

What about early retirees?

The vast majority of the studies on safe withdrawal rates have been done using 30-year (or shorter) time horizons. However, early retirees may have 40, 50, or 60 years of life where they are dependent on their retirement savings. What SWR works for that extended period of time? As noted above, one study concluded that a rate of 5.2%-5.6% may work over 40 years with dynamic spending adjustments.

Karsten Jeske has written extensively about safe withdrawal rates on his site Early Retirement Now. From the table below we can make a few observations.

• For portfolios with 50% stocks, a 3.25% withdrawal rate had a 100% success rate over 40-year periods and a 98% success rate over 50-year periods.

• For portfolios with 75% stocks, a 3.50% withdrawal rate had a 100% success rate over 40-year periods and a 99% success rate over 50-year periods.

Not surprisingly, the safe withdrawal rate decreases some with longer time horizons. 

Success Rates

When planning retirement withdrawals, aiming for a 100% success rate is a noble goal—but it’s often unnecessarily cautious and comes at a steep cost. Accepting an 80% success rate can strike a smarter balance between enjoying your hard-earned savings and ensuring they last. Here’s why.

A 100% success rate demands ultra-conservative assumptions which means you're likely slashing your spending power and potentially leaving millions unspent when you die. Historical data, like the Trinity Study, shows a 4% withdrawal rate succeeds 95%+ of the time over 30 years with a 50/50 portfolio. Dropping to 80% success might let you bump that to 4.5% or 5%, unlocking thousands more annually for travel, family, or passions—without much added risk. And the table from Early Retirement Now shows that a 4.5% SWR is possible over 40 year periods (for portfolios with at least 75% stocks).

An 80% success rate assumes flexibility—say, cutting expenses 10-20% in a bad market year (like skipping a cruise). Studies like Kitces’ 2021 Monte Carlo work show that even a 50% success probability works with modest adjustments. Real-world retirees adapt; a 100% plan assumes you won’t, which is unrealistic and wasteful.

Choose 80%. It’s not reckless—it’s rational. You didn’t save to scrape by; you saved to live.