What is the 4% Rule?
The 4% rule is one of the most well-known guidelines in retirement planning. Simply put, it suggests you can withdraw 4% of your portfolio in your first year of retirement, then adjust that amount for inflation each year, with a high probability your money will last at least 30 years.
This rule emerged from the famous "Trinity Study" conducted by three professors at Trinity University in 1998. They analyzed historical stock and bond returns going back to 1926 and found that a 4% initial withdrawal rate had a high success rate across various market conditions.
How the 4% Rule Works in Practice
Let's say you've saved $1,000,000 for retirement. Using the 4% rule:
- Year 1: Withdraw $40,000 (4% Ă— $1,000,000)
- Year 2: Withdraw $40,800 (adjusted for 2% inflation)
- Year 3: Withdraw $41,616 (adjusted again)
- And so on...
The beauty of this approach is its simplicity. You don't need to constantly recalculate based on market performance—you just take your inflation-adjusted amount each year.
When the 4% Rule Works Well
The 4% rule tends to work best when:
- âś… You have a diversified portfolio of stocks and bonds (typically 50-75% stocks)
- âś… Your retirement timeline is 30 years or less
- âś… You're flexible and can reduce spending during market downturns
- âś… You have other income sources like Social Security to reduce portfolio dependence
When to Adjust Your Withdrawal Rate
The 4% rule isn't perfect for everyone. Consider adjusting if:
Go Lower (3-3.5%)
- You're retiring early (before 55)
- You want extra safety margin
- You have no pension or Social Security
- Current market valuations are high (like today)
Go Higher (4.5-5%)
- You have guaranteed income covering basic expenses
- You're retiring later (after 67)
- You're flexible on spending
- You have significant home equity as backup
Monte Carlo Simulation: Beyond the 4% Rule
While the 4% rule uses historical sequences, Monte Carlo simulation takes a more sophisticated approach. It runs thousands of random market scenarios to show you the probability of success for any withdrawal rate.
RetirePro runs 1,000 Monte Carlo simulations for every retirement projection, giving you:
- Success rate percentage (e.g., 87% of simulations succeeded)
- Worst-case scenarios (what happens if markets crash early?)
- Best-case scenarios (potential upside)
- Year-by-year probability analysis
This is far more powerful than relying on a single rule of thumb.
How to Stress-Test Your Retirement Plan
Here's a practical framework for testing your withdrawal strategy:
- Start with your target spending - What do you actually need per year?
- Add guaranteed income - Social Security, pensions, annuities
- Calculate the gap - What must come from your portfolio?
- Compute your required withdrawal rate - Gap Ă· Portfolio value
- Run Monte Carlo simulations - Is your success rate above 85%?
If your required withdrawal rate is above 4% and success rate below 85%, you have options:
- Delay retirement and save more
- Reduce planned spending
- Find additional income sources
- Consider a part-time retirement transition
The Bottom Line
The 4% rule is a useful starting point, but your retirement is too important for rules of thumb. Use tools like RetirePro to model your specific situation, run Monte Carlo simulations, and stress-test your plan against various scenarios.
Your future self will thank you for the extra analysis.
Related Calculators
- Free Retirement Calculator - Calculate how much you need to retire
- Early Retirement (FIRE) Calculator - Plan your path to financial independence
- Retirement Savings by Age - See if you're on track for your age
Ready to stress-test your own withdrawal strategy? RetirePro's free Monte Carlo simulator runs 1,000 scenarios on your portfolio. Start your free plan →