The 4% rule is a retirement spending guideline: in the first year of retirement, withdraw 4% of your investment portfolio, then raise that dollar amount by the inflation rate every year after, whatever the markets do. Historically, this pattern lasted at least 30 years. With $1,000,000 saved, the first-year withdrawal is $40,000.
The rest of this guide covers where the number comes from, how to calculate it, how long the money lasts under different returns (computed with CalcWisp's own withdrawal model), and the situations where 4% is too high.
Where does the 4% rule come from?
The rule comes from a study by financial planner William Bengen, "Determining Withdrawal Rates Using Historical Data," published in the October 1994 Journal of Financial Planning. Bengen used actual U.S. stock, bond and inflation data from 1926 onward and asked a simple question: if a retiree takes a fixed percentage in year one and adjusts the dollar amount for inflation after that, how many years does the portfolio last?
His main findings, for a portfolio of 50% common stocks and 50% intermediate-term Treasury notes:
| First-year withdrawal | Result in Bengen's historical tests |
|---|---|
| 3% (up to about 3.5%) | Never lasted less than 50 years |
| 4% | Never exhausted in less than 33 years; most cases lasted 50 years or longer |
| 4.25% | Could be exhausted in as little as 28 years |
| 5% | Retirees starting in the late 1960s and early 1970s could run out in about 20 years; Bengen called it "risky" |
| 6% or more | Described as "gambling" |
Bengen also concluded that a stock allocation between 50% and 75% was the best starting point, and that allocations below 50% stocks shortened portfolio life rather than protecting it. He charted how long each portfolio lasted, up to 50 years, and recommended about 4% for clients aged 60 to 65 who needed their money to last at least 30 years.
How do you calculate the 4% rule?
There are two directions.
From savings to spending:
first-year withdrawal = portfolio × 0.04
withdrawal in year n = previous year's withdrawal × (1 + inflation)
From spending to savings (the "25x rule"):
savings needed = yearly spending from the portfolio × 25
The two are the same rule: 1 ÷ 0.04 = 25.
After the first year, the percentage no longer matters. If the portfolio drops, the withdrawal does not drop with it; if it rises, the withdrawal does not rise faster than inflation. That fixed, inflation-indexed paycheck is exactly what Bengen tested.
Worked example: $1,000,000 portfolio
- Year 1: $1,000,000 × 4% = $40,000 ($3,333 a month).
- Year 2, with 3% inflation: $40,000 × 1.03 = $41,200.
- Year 6: $40,000 × 1.03⁵ = $46,371.
- Year 11: $40,000 × 1.03¹⁰ = $53,757.
- Year 30: $40,000 × 1.03²⁹ = $94,263.
By year 30 the withdrawal has more than doubled in dollars, but it buys the same as $40,000 did in year one.
Worked example: how much do you need to retire on $60,000 a year?
Suppose a couple wants to spend $60,000 a year and expects $24,000 a year from Social Security. The portfolio only has to cover $36,000, so the target is $36,000 × 25 = $900,000. Without Social Security in the picture, the target would be $60,000 × 25 = $1,500,000.
How long does money last under the 4% rule?
Bengen's results come from historical sequences. A simpler way to see the mechanics is to assume one steady return every year. The table below uses CalcWisp's savings withdrawal calculator model: $1,000,000, a first-year withdrawal of $40,000 taken in monthly installments, raised 3% each year for inflation, with interest compounded monthly. Results were cross-checked in Python.
| Steady annual return | Money lasts | Balance after 30 years |
|---|---|---|
| 2% | 22.8 years | $0 |
| 3% | 25.6 years | $0 |
| 4% | 29.5 years | $0 |
| 5% | 35.8 years | $521,220 |
| 6% | 48.6 years | $1,355,775 |
| 7% | Does not run out | $2,559,298 |
The key number is the gap between return and inflation, sometimes called the real return. With inflation at 3%, a 4% return (about 1% real) lasts just under 30 years; a 5% return (about 2% real) leaves half the starting balance after 30 years.
What if you start higher or lower than 4%?
Same model, $1,000,000, 3% inflation, steady 5% return:
| First-year withdrawal rate | Dollars in year 1 | Money lasts |
|---|---|---|
| 3% | $30,000 | 57.5 years |
| 3.5% | $35,000 | 44.0 years |
| 4% | $40,000 | 35.8 years |
| 4.5% | $45,000 | 30.3 years |
| 5% | $50,000 | 26.3 years |
| 6% | $60,000 | 20.8 years |
Each half-point added to the starting rate cuts years off the end. At 6%, even a steady 5% return runs out in under 21 years.
Why the order of returns matters
Steady returns are a simplification. Real markets go up and down, and losses early in retirement do more damage than the same losses later. This is sequence-of-returns risk.
Take two retirees with $1,000,000, each withdrawing $40,000 at the start of the year and raising it 3% a year. Both get exactly the same 30 yearly returns (three years of −15% and 27 years of +8%), only in a different order:
| Losses come first | Losses come last | |
|---|---|---|
| Years 1–3 | −15%, −15%, −15% | +8% |
| Years 4–27 | +8% | +8% |
| Years 28–30 | +8% | −15%, −15%, −15% |
| Outcome | Money runs out in year 21 | $1,644,985 left after 30 years |
The compound average return is identical (about 5.44% a year) in both cases. The difference is that the first retiree sells shares at low prices to fund withdrawals, and those shares are not there for the recovery. Bengen's own data shows the same effect: a 1929 retiree who began at 4% was withdrawing about 7.6% of a shrunken portfolio by the end of 1932.
How does the 4% rule compare with RMDs?
Required minimum distributions are a different calculation: the IRS sets a minimum you must take from traditional IRAs and 401(k)s each year, equal to the prior year-end balance divided by a factor from the Uniform Lifetime Table. Converted to percentages:
| Age | IRS distribution period | RMD as % of balance |
|---|---|---|
| 73 | 26.5 | 3.77% |
| 75 | 24.6 | 4.07% |
| 80 | 20.2 | 4.95% |
| 85 | 16.0 | 6.25% |
| 90 | 12.2 | 8.20% |
At 73 the required minimum is a little below 4%, but by the mid-70s it passes it. An RMD is a minimum withdrawal, not a spending rule: money taken out can be reinvested in a taxable account. The RMD calculator and the RMD table for 2026 show the full factors.
When the 4% rule may not fit
- Retirements longer than 30 years. Bengen's 3% rate never lasted less than 50 years; someone retiring at 50 may lean toward that end.
- Conservative portfolios. The study found allocations below 50% stocks shortened portfolio life.
- Fees and taxes. The 4% is a gross figure. Fund fees reduce the return, and any income tax on withdrawals is paid out of the 4%, not on top of it.
- Flexible spending. Retirees who can cut spending after a bad year can usually start higher; people with fixed costs have less room.
Building up to the target is the other half of the plan: the compound interest calculator and the guide to 401(k) contribution limits for 2026 cover the saving side.
This guide is for education only and is not financial advice.