%4 Rule: Retirement Planning

💰 Understanding the 4% Rule in Retirement Planning

The 4% rule is one of the most commonly cited guidelines for determining how much you can safely withdraw from your retirement savings each year. It’s designed to help retirees ensure their money lasts through a 30-year retirement.

While not a perfect formula, it offers a helpful starting point for long-term financial planning.

📏 What Exactly Is the 4% Rule?

The rule states that in your first year of retirement, you withdraw 4% of your total investment portfolio, and each year after, you adjust that amount for inflation.

It assumes a balanced portfolio of stocks and bonds and aims to prevent you from outliving your savings.

The basic idea to know the amount that you can withdraw from your retirement savings without draining your nest egg too quickly.

📊 Why a Balanced Portfolio Matters

The 4% rule works under the assumption that your money is invested in a balanced portfolio, typically around 50–60% stocks and 40–50% bonds.

Stocks historically provide long-term growth, while bonds offer stability during market downturns. Depending on economic cycles, a mix like this has historically produced average annual returns of about 5–7% after inflation.

These returns help your portfolio grow even as you withdraw.

Too little stock exposure may make it harder for your savings to keep pace with withdrawals and inflation.

🧮 A Simple Math Example

For the sake of simplicity, let’s say you retire with $1,000,000 saved.
• In year one, you would withdraw 4% = $40,000.
• In year two, you withdraw $40,000 + inflation (for example, if inflation is 3%, then $41,200).
• This continues each year to maintain your purchasing power.

Note: Retirement savings will vary depending on multiple variables. No matter how much or how little you have in your savings at the time of retirement, the withdrawal amount is calculated the same way.

📜 Where the Rule Comes From

The 4% rule originated from the 1994 “Trinity Study,” a well-known analysis that examined safe withdrawal rates under different historical market conditions.

The researchers tested portfolios and time horizons to identify a withdrawal rate that reliably supported a 30-year retirement.

Their findings led to the widespread adoption of the “4% rule” as a baseline planning tool.

Although the 4% rule is still relevant, it is no longer considered a one-size-fits-all strategy. Individuals can think of it as a useful baseline and not a guaranteed formula. (More on that later.)

⚖️ A More Conservative Approach

For a more cautious approach, many financial planners recommend a 3% to 3.5% withdrawal rate.

This is especially relevant for:
• Retirements expected to last 30–40+ years
• Individuals with limited ability to cut spending
• Those concerned about lower future market returns

📝 Important Reminder: Taxes & Penalties Matter

Before following the 4% rule, be aware of tax implications and withdrawal rules for your specific accounts.
Common considerations include:
• Traditional vs. Roth IRAs — traditional withdrawals are taxable; Roth withdrawals may be tax-free if conditions are met
• Age requirements — withdrawing before 59½ may trigger penalties
• Required Minimum Distributions (RMDs) — traditional accounts require forced withdrawals starting at age 73 (or your applicable IRS age)
• State taxes, account-specific rules, and inheritance considerations

Understanding these rules helps ensure your withdrawal strategy doesn’t accidentally increase your tax burden or trigger avoidable penalties.

the 4% rule is still relevant in 2025 and beyond, but it’s no longer considered a one-size-fits-all strategy.
Think of it as a useful baseline, not a guaranteed formula.

Here’s the 2025 perspective:

✅ Why the 4% Rule Is Still Relevant

Despite changing markets, the core principles behind the 4% rule still matter:

• It forces you to think about sustainable withdrawal rates instead of overspending.

• It encourages retirees to plan for long-term portfolio growth.

• It’s supported by decades of historical data showing it can work—under the right conditions.

• It remains a helpful starting point for conversations with financial planners.

• It helps retirees to think about how to spend their nest egg instead of how to save and grow their nest egg.

Even critics agree: it’s better than guessing.

⚠️ Why Some Experts Consider It Less Reliable, Today

Certain conditions make the 4% rule less airtight than it was in the ‘90s:

• Lower expected bond returns than past decades

• Higher inflation unpredictability

• Longer retirements (many people now plan for 30–40+ years)

• Increased market volatility compared to the time period in the original study

These factors don’t break the rule entirely—they just make it more conservative to start lower or to adjust spending over time.

🔧 How Professionals Use It, Today

Instead of treating the 4% rule as a rigid law, planners now use it as a framework:

Modern adaptations include:

• Starting with 3–4%, then adjusting based on market performance

• Using “guardrails” (cutting spending in bad years, increasing in good years)

• Running Monte Carlo simulations to test thousands of outcomes and scenarios

• Using a dynamic withdrawal strategy tied to portfolio values

This makes the rule more flexible and resilient for future retirees.

⭐ So… Is It Still Useful?

YES — as long as you treat it as a guideline, not a guarantee.

The 4% rule is still a solid tool for:
• Setting savings targets
• Estimating retirement readiness
• Creating a safe initial withdrawal rate
• Comparing retirement plan scenarios

It’s less useful if you assume it will work for every person, every portfolio, or every economic era.