It's the most famous rule in retirement planning. It's also built on one thing you can't control: what the stock market does after you retire.
What the 4% rule says
In your first year of retirement, withdraw 4% of your savings. Each year after that, take the same dollar amount, raised for inflation. Do that, and history says your money should last at least 30 years.
Example: retire with $1,000,000 and you take $40,000 the first year. If inflation runs 3%, you take $41,200 the next year, and so on.
Where it came from
Financial planner William Bengen published the idea in 1994. He tested every 30-year retirement since 1926, using a mix of stocks and bonds, and found 4% survived even the worst stretches. A few years later, in 1998, three professors at Trinity University ran a similar study and got a similar answer. That became known as the Trinity Study.
Bengen has since revisited his own work. He now says a starting rate closer to 4.7% held up in his newer research. The core idea hasn't changed: start with a modest withdrawal and adjust for inflation.
Why people like it
- It's simple. One number tells you roughly how much you can spend.
- It's tested. It held up through the Great Depression, high inflation in the 1970s, and other bad markets.
- It's a starting point. You can adjust it to fit your own plans.
Where it falls short
- Bad timing can hurt you. If the market drops hard right after you retire, you're selling investments at low prices to pay your bills. That damage is hard to undo. Planners call it sequence-of-returns risk.
- The past isn't a promise. The rule is based on history. The next 30 years may look different.
- Life isn't average. Health costs, a long life, or a big surprise expense can throw the plan off.
- It assumes you sell. Your income comes from selling a slice of your investments every year, whatever the market is doing.
A different way to think about retirement income
The 4% rule asks: "How much can I safely sell each year?"
Another question is: "How much income can my money pay me without selling anything?"
That's where interest-paying assets come in. A first mortgage note pays on a schedule, set by the loan. When you lend on notes, your income comes from those payments, not from selling stock in a down market. And there's real estate behind the loan.
That's not a replacement for a full plan. Notes have their own risks. Borrowers can stop paying, and your money is tied up for the term. But for many retirees, mixing steady interest income with a stock portfolio means less selling in bad years.
I wrote Mailbox Money Retirement for exactly this. It covers how to build retirement income you can count on, without depending on Wall Street.
General education, not tax, legal, or investment advice. Tax rules change. Talk with your CPA or tax attorney about your situation. All investing has risk, including loss of principal.