Is the 4% Rule Safe to Use in Retirement Planning?

Is the 4% Rule Safe to Use in Retirement Planning?The 4% rule is probably one of the most well-known ideas in the FIRE (financial independence/early retirement) community.  It provides a way to put some actual numbers to your future needs.

But is it safe to rely on this rule for your own retirement planning?

Let’s start with digging in a little further on what the 4% rule is first…


Some background on the 4% rule

The biggest focus folks have in retirement planning is how much money they need to have socked away.  Will it be enough to sustain them throughout the rest of their lives?

If you build up a portfolio of investments over the years, your hope is that you can withdraw from that portfolio over the years without the well ever running dry.

Between the volatility of the market, inflation eroding the value of your portfolio, and you withdrawing money out of it, you need a solid portfolio in place.

But how much money do you need to make this happen?

Up until the mid-nineties, there really wasn’t a proven number you could use when planning your own retirement.  It was generally recommended that 5% be your safe withdrawal rate.  In other words, you could pull out 5% of your portfolio every year in your retirement until you die without running out of money.

The problem was that this was just a guideline and there wasn’t any concrete evidence that this would always work.

In 1994, a financial advisor named William Bengen decided to change that.  He performed a study that looked into historical returns and all the ups and downs of the market throughout.

What he determined was that even during the worst downturns of the stock market, there was no case that existed where a 4% annual withdrawal rate wasn’t sustainable for a retirement portfolio over the course of 33 years.

And with that, the 4% rule was born.

Financial planners now had something to use with their clients and the FIRE community has latched onto this idea as the golden rule for early retirement.

In 1998, a new paper followed called “Retirement Savings: Choosing a Withdrawal Rate that is Sustainable.”  In the FIRE community, it’s generally known as the Trinity Study and was written by Philip L. Cooley, Carl M. Hubbard, and Daniel T. Walz.

This study focused more on asset allocation and looked at historical data from 1926 to 1995.  In the inflation-adjusted numbers, it showed there was a 95% chance of success that a portfolio of 100% stocks should hold up over a 30-year period with a 4% withdrawal rate.

They also found that a portfolio consisting of 75% stocks and 25% bonds should have a 98% rate of success based on the data.

That’s a pretty strong success rate to see.  Thus, the 4% rule is referenced by many looking for retirement and particularly those looking for early retirement.


The 4% rule in practice

Is the 4% Rule Safe to Use in Retirement Planning? - The 4% rule in practice
Ok, it’s not a 100% of the pie – it’s not even a pie! But, man, I do love a good carrot cake!

Putting the 4% rule into play means flipping it upside down with some basic math.

Your whole portfolio is 100% of the pie, right?  Take that 100% and divide it by 4 (as in the 4% rule) and you get 25.  That 25 is the key number that you usually hear tossed around alongside the 4% rule.

The idea is that if you can figure out your costs of living (your annual expenses) and get your portfolio to be 25 times that number, you’re now aligned with the 4% rule and no longer have to work.

So if your yearly expenses are $40,000, you can multiply that by 25 to get $1,000,000.  When your portfolio reaches $1M, you’re in the clear according to the rule.

Bear in mind that the Trinity Study took into account inflation.  In our example above, the first year you’d be withdrawing $40k, but the second year would be adjusted for inflation.  At 3%, that would mean you’d take $41,200 and it would increase every year.

The funny thing is that in most cases, following the 4% rate of withdrawal would also leave your original portfolio value in tact.  And in a number of cases, your original portfolio value would actually grow over that time period.

Are you starting to see how simple this is for retirement planning?


Concerns with the 4% rule

Is the 4% Rule Safe to Use in Retirement Planning? - Concerns with the 4% rule
This guy represents concern – at least that’s what my daughter picked out for this post… so deal with it!

Sweet!  So all I need to do is get 25 times my expenses and I can retire for good?  Sold!  Count me in!

Not so fast, bucko!  There are some concerns you need to take into consideration with the 4% rule…


30 years

The data used for the Trinity Study was over the course of 30 years.  The idea behind the study was for folks to see where they need to get to for traditional retirement.

Early retirees can have a much longer course that their portfolios need to carry them – 40, 50, 60 or maybe 70 years!

Part of the conclusion of the research even states: Early retirees who anticipate long payout periods should plan on lower withdrawal rates.

Right off the bat, the fellas are telling us to be careful when applying this to FIRE scenarios.


Asset allocation

The Trinity Study looked at allocations consisting of different percentages of stocks and bonds.    They used the S&P 500 index to represent the stocks and long-term high-grade corporate bonds for the bond allocations.

Supposing that everything would work perfectly in the 4% rule, I don’t know anyone who solely has these allocations as their entire portfolio.

Even if close, there’s probably a good chance of the presence of some other odds and ends in the mix.  Maybe some individual stocks, or some international stocks, or some other hodge-podge of securities, bonds, or other investments.



The Trinity Study does not include taxes or transaction costs in their numbers.

This is a big deal!  Depending on your FIRE strategy, taxes could take a pretty good bite out of your withdrawals.

So even if you have a plan, you had better have a good tax strategy in place as well.


Historical data / Rates of return

Every financial institution in the world of investing has a disclaimer similar to Past performance is not indicative of future results.  There’s a reason for that.

All the research in the two studies that formed the notion of the 4% rule is based on historical data.  No one knows what the stock market’s going to do tomorrow, a year from now, or a decade from now.

So how are we supposed to assume that the 4% rule will work in the future?

We can’t.  No one knows what to expect.  Although the rule gives us something to go off, it’s really just some guesses based on how everything’s worked out in the past.

To top that off, here’s a headline for you:

Jack Bogle believes the stock market will return only 4% annually over the next decade

That’s right, in early 2017, Jack Bogle – the legend the FIRE community puts on a pedestal for his visionary expertise – feels that the stock market is not going to produce exceptional gains as a whole for another decade.

Bogle is well respected by millions.  He’s the guy who founded Vanguard and brought index funds to the mainstream investor.  When this guy talks, people listen.

Now a decade isn’t the end of the world and the market is always moving up and down, but lower rates of return could skew your return as a whole.  If Bogle is accurate and you’re planning to retire during the decade of these nominal returns, you could be hurting your portfolio over the long haul.

If you’re pulling out more money than can keep up with the gains, that means you’re left with less principal to grow over the years.  Ouch.

If these thoughts make you a little uneasy about using 4% rule, they should.  They could hinder your entire future if you just tried to replicate the information in these studies.

One simple fix is to make your projections off a lower withdrawal rate.

Instead of using 4%, you’ll find a number of folks in the FIRE community who are working off 3.75% or 3.5%.  I’ve even heard some going as low as 3%, although that seems to be very low.

It’s really a matter of what makes you feel the most secure.  No one knows how the future will go, but the lower your withdrawal rate, the better your chances of success.  Obviously, a lower withdrawal rate means you’ll need more in the pot of investments so you would need to keep building until you reach that point.


The 4% rule in regards to the Route to Retire family

Is the 4% Rule Safe to Use in Retirement Planning? - The 4% rule in regards to the Route to Retire family
I wish I was this organized in my planning. This guy must be deep in thought!

On its surface, the 4% rule is perceived as your only source of income.  You invest in stocks/bonds and then quit your job when you have 25 times your expenses.

However, if you have other sources of income, you don’t necessarily need 25x your expenses (though it couldn’t hurt!).

As part of our plan, we have some rental income coming in.  We have a single-family house we’ve had since 2003.   We paid off the mortgage on the rental house with a HELOC in 2016 and then decided to pay off the HELOC in 2017.  So that property is now cash-flowing nicely.

We also bought a duplex in 2015.   Although that mortgage should be ongoing for a while, that property gives off a nice profit every month regardless.

Finally, we’re still deciding what we’ll do with the house we’re currently living in.  When we move to Panama in 2020, we’ll probably choose to rent it out instead of selling it.  So that would be some additional income as well.

The point is that we’ll already have some income coming in to cover a small part of our expenses.

The simplest way for us to use the 4% rule is to take our total expenses and subtract out the amount that will be covered by our rental income.  Then we can multiply the leftover amount by 25 to determine how much we’ll need to pull in from our stock market investments.

And that’s what we’re doing.

This is where some folks might feel that’s too aggressive of a plan.  However, we have a couple of factors that should keep us pointed in the right direction:

  • Our expenses are based on the numbers here in the U.S.  I don’t anticipate our expenses will be that high in Panama.  In fact, with the exception of the move itself, I anticipate lower expenses while we’re there… much lower.
  • I’m not planning on sitting on my butt and drinking piña coladas all day (though we’ll fit some of that in!).  We’re trying our hands at building up a couple of small businesses.  It’s too early to project solid numbers right now, so to be conservative, we don’t factor that into our income.
  • We’re flexible.  Just because it’s called the 4% rule doesn’t mean you have to spend 4%.  When the market’s soft, we’re willing to chill and keep our expenses lower than normal.  On the flip side, when the market’s doing well, we’ll probably treat ourselves to an extra cruise or something we enjoy.

I like the 4% rule as a baseline for our situation, but I’m careful not to lean on it as the holy grail.  I think being conservative on several avenues should put us in a good spot for retirement.


The 4% rule is a great start to give you a general idea of where you ought to be heading in your retirement planning.  However, it should be treated more as a rule of thumb than an actual rigid rule.  Use it as a guideline just to keep you pointed in the right direction.


Is the 4% rule already part of your retirement planning strategy?  If so, how strict are you using it in your plans?


Thanks for reading!!

— Jim

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22 thoughts on “Is the 4% Rule Safe to Use in Retirement Planning?”

  1. Great overview Jim. I use the 4% rule as a guideline also. When I closer to retiring, I’ll take a closer look at what withdrawal rate makes the most sense at that time. Using geo-arbitrage to offset some of your needs early will lower the sequence of return risk and leave you in a great place to make your money last.

    1. Thanks, Jason – I think that’s a smart way you’re doing it. Get the general idea of where you need to be with 4% rule and then iron out the specifics as you close in on the big day.

      And haha, yeah, I guess our move to Panama is about as geo-arbitracious as you can get! I made that word up, but it still sounds pretty cool! 🙂

      — Jim

  2. Hey Jim, there’s an insanely comprehensive look at the 4% rule over at Early Retirement Now. “BIG ERN” has, in essence, written a Doctoral thesis through these posts. Amazing stuff. His conclusion: 4% is no longer valid, and one should target closer to 3.25% to be safe. Obviously, real estate and other considerations make specific cases unique, but we’re targeting 3.25% when we FIRE in June 2018. Good post!

    (BTW, did you daughter write this? I heard she’s becoming quite the Rockstar Blogger! Congrats again on that big award today!)

    1. Haha, I let the 7-year-old take a rest today – she earned it! 😉

      Yeah, Big ERN goes into the safe withdrawal rates with a vengeance! He definitely knows his stuff and has put together some great information on the topic.

      Your FIRE day’s creeping up fast and, at 3.25%, that should really put you in the safe zone!

      — Jim

  3. Morning! Discovered your blog through Rockstar Finance and I’m having a bit of a rummage around.
    I’m very fond of the 4% Rule, as it gave me a definite target to aim for when I first started looking at retirement. However, now I’m a few years in, I’m learning to tweak it a bit.

    1. Glad you found your way here, Frogdancer – welcome to the party! 🙂

      That seems to be the way to do it – use the rule as a rule of thumb to get you going and then adjust as you move further on down the path.

      — Jim

  4. Sounds like you are in great shape. And the move to Panama will only give you more cushion when the market goes down. You might not even need to withdraw from your retirement funds based upon your rental income. Cheers to that.

    1. Thanks, Jason – I don’t think we’ll have enough to run with on our rental income, but hopefully the blog income continues to grow by that time to provide a little extra cash flow. Even though I think we have a good plan in place, I’m still a little nervous about the details of our withdrawal plan just because it’s something new for us (obviously!).

      — Jim

  5. We’re using the 4% rule as a general guideline. Of course, we aren’t retiring as early as many and expect to earn some income once we quit the cubicle jobs so we should be good. We may rent our home instead of selling it as well so that would also help.

    1. So true, Amy – we’re in a similar boat on not retiring as early as a lot of the young whipper-snappers out there are planning to do! Wish I knew at that age some of the things they already know! 🙂

      — Jim

  6. I’d be curious to know more about your business adventure ideas when you get to Panama. Hopefully you’ll write about it 😉 I think your rental income is incredibly helpful in reducing your anxiety about the 4% rule. You also have some paid off properties – which can be sold if need be too. Hard to believe you plan to move in two years! It’s going by so fast!

    1. Good point on being able to sell properties if needed – although I hope that need doesn’t arise! 🙂

      I’m excited (and a little nervous) about the move, but I think it really will be great. Hopefully, the Route to Retire brand will continue to grow and I’ll be cultivating that while down there. Other ideas are up in the air, but yes, I’ll definitely write about anything that we have going on.

      — Jim

  7. Thanks for this informative post! I didn’t know about the study being run for a 30 year model only.

    I’m hoping to use both investment gains and rental income to fund my early retirement. Hopefully that can counter any risks. Of course, going back to work for a specified period is another protection.

    1. That’s the nice thing about early retirement… you’re young enough that you can go back to work either part or full time if needed (or desired). Chances are a lot of us are probably going to find a way to be making some kind of additional income anyway.

      — Jim

  8. I like the 4% rule. It gives you a good goal to shoot for. I still think 4% would work out for most people. If you’re flexible and cut back on slow years, I’m pretty sure it would be fine.
    3% would be very safe if you can swing it. You Panama plan sounds really good. I’m looking forward to reading more about it.

    1. That’s probably going to be the biggest key – flexibility. If someone’s not willing to be flexible during market swings, they should probably be more conservative than 4%.

      — Jim

  9. I early retired assuming a 2.5% rule but my two day a week side gigs are doing extremely well so I’m actually using the zero percent rule and living off my six figure side gig income. Frankly I think the 4% rule is conservative in almost every case but since I’m at zero percent I don’t have skin in the game. The thing that makes 4% work in any environment is that people can monitor the markets and they can adjust their behavior as required to avoid drawing down the nest eggs. They can work part time or just go freakin frugal for a season if required. The 4% rule assumed people were oblivious to what was going on and for the FIRE community oblivious is never going to apply. We are the definition of knowing what is happening.

    1. You’ve got one of the best scenarios out there, Steveark! Being in a position where you’ve found yourself able to afford an ultra-conservative withdrawal rate and still not even needing to use it is fantastic!

      The importance of being able to adapt on the 4% rule (or really any percent) is so dead on. If you can’t change along the way, anything close to the 4% rule might not be good for folks.

      Thanks for stopping by!

      — Jim

  10. Great post Jim, and very well written! This sums up a lot of the issues I have with the 4% rule.

    There’s more problems too ! For example, the US gdp growth rates during the trinity study were *twice* what they are today.

    We’ve taken a much more conservative track, spending under 3% of our assets. I think this year it was 2.5%. Even if Bogle is right, then 2.5% should see us through.

    1. Thanks, Mr. Tako! Yeah, if Bogle’s on track (and I’m guessing he’ll be in the ballpark), it truly makes sense to focus on a more conservative withdrawal rate. That’s fantastic that you’re floating at around 2.5-3%! That might be depressing for some folks since it makes the target further away for them, but it’s better to get it right now versus after quitting a job.

      — Jim

  11. I’m still too far away to think about that but I think I’ll use something slightly more conservative than 4% when I get closer. That’s just my way of being safer than most since one can never tell what kind of returns we’ll have in the future.

    1. Nothing wrong with being conservative. The only factors I can think of as a downside to over-planning is the cost of time (if you plan to quit your job) and that you might end up saving too much. And by too much, I mean too much for you to spend without the intent of passing anything on down to heirs. Otherwise, it seems like the smarter play to make.

      — Jim

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