The 4% rule

The 4% rule says you can take 4% of your portfolio in your first year without work, raise that amount with inflation every year after, and the money should last at least 30 years. Turned around, it gives the usual FIRE number of 25 times your yearly spending.

Where it comes from

William Bengen, a financial planner, published "Determining Withdrawal Rates Using Historical Data" in the Journal of Financial Planning in October 1994. He tested withdrawals against US market history, with the S&P 500 for stocks and intermediate-term Treasuries for bonds, rebalanced once a year. With 50 to 75% in stocks, a 4% start never emptied the portfolio in less than 33 years, and in most periods it lasted 50 years or more. At 5%, people who retired in the late 1960s and early 1970s ran out after about 20 years.

In February 1998 Philip Cooley, Carl Hubbard and Daniel Walz, three professors at Trinity University in Texas, published a similar study in the AAII Journal using US data up to 1995. They tested payout periods of 15 to 30 years, and withdrawals of 3% to 4% had high success rates for portfolios mostly in stocks. That paper is known as the Trinity study, and between them the two papers are where the 4% figure comes from.

What it assumes

• A retirement of about 30 years.
• Only US stocks and bonds.
• The same withdrawal every year, raised with inflation, whatever the market does.
• No fund fees and no tax.

Why early retirees often pick 3% to 3.5%

If you stop at 40, the money may need to last 50 years or more, and the longer it has to last, the less you can safely take each year. The order of returns matters as well. A crash in your first years without work does lasting damage, because you sell shares cheaply to pay the bills and those shares aren't there when the market recovers. The same crash 20 years in does much less harm. In Bengen's tests, 3% to 3.5% lasted at least 50 years in every period.

A lower rate means a bigger number and more years of saving. Say you spend €30,000 a year, have €50,000 invested, add €1,000 a month and earn 7% a year before 2% inflation:

With these numbers, 3.5% adds about two years at work and 3% almost five.

Keeping 4% safer

Few people follow the rule as rigidly as the studies did. Spending a little less after a bad year helps a lot, and so does some part-time income in the first years, as in Barista FIRE. A state pension that starts later also helps, because from then on you need less from the portfolio.

If you'd rather keep it simple, plan with 3.5% and treat anything left over as a margin.