# What Is the 4% Rule for Withdrawals in Retirement?

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*— Investopedia / Laura Porter*

## What Is the 4% Rule?

The 4% rule is a retirement withdrawal guideline suggesting retirees withdraw 4% of their retirement account in the first year and adjust that amount for [inflation](https://www.investopedia.com/terms/i/inflation.asp) annually. This strategy aims to sustain funds for approximately 30 years, relying on [investment returns](https://www.investopedia.com/terms/r/returnoninvestment.asp) to provide a steady income stream from interest and dividends. However, this rule might not suit early retirees needing income for longer periods. While some financial advisers, like the creator Bill Bengen, consider 5% feasible in most scenarios, others suggest 3% as a safer withdrawal rate. The reality is that the effectiveness of the 4% rule may vary based on individual circumstances and market conditions.

### Key Takeaways

*   The 4% rule is a retirement guideline suggesting you can withdraw 4% of your retirement savings in the first year, then adjust for inflation annually, ideally lasting for 30 years.
*   Originally devised by financial adviser Bill Bengen, the 4% rule was tested against historical market data, including harsh economic periods, and is deemed relatively stable.
*   Experts debate its efficacy, with some suggesting a 5% withdrawal rate may be feasible under certain conditions.
*   The rule assumes a balanced portfolio, but retirees may need to adjust allocations based on personal circumstances and market changes.
*   While simple and predictable, the 4% rule requires strict adherence and may not be suitable for those retiring early or with significant lifestyle changes.

## How the 4% Rule Helps Plan Your Retirement Withdrawals

The 4% rule is a guideline used by some financial planners and retirees to [estimate a comfortable but safe income](https://www.investopedia.com/how-long-will-my-401k-last-in-retirement-8621297) for retirement.

[Life expectancy](https://www.investopedia.com/terms/l/lifeexpectancy.asp) is key in deciding if the 4% rate will last. Retirees who live longer or retire early need their portfolios to last longer, and their [medical costs](https://www.investopedia.com/terms/m/medical-expenses.asp) and other expenses can increase with age.

## The Origins and Development of the 4% Rule

Bill Bengen, a financial adviser, developed the 4% rule in the mid-1990s. Some people say that the rule has been over-simplified, because he actually said that the 4% rule was based on a "worst-case" scenario and that 5% would be a more realistic number.

The rule is based on historical [stock](https://www.investopedia.com/terms/s/stock.asp) and [bond](https://www.investopedia.com/terms/b/bond.asp) data from 1926 to 1976, emphasizing downturns in the 1930s and 1970s.

Bengen concluded that, even during untenable markets, no historical case existed in which a 4% annual withdrawal rate exhausted a retirement portfolio in fewer than 33 years.

## Adapting the 4% Rule for Inflation

Retirees can adjust their 4% withdrawal rate for inflation to maintain purchasing power. Possible ways to adjust for inflation include setting a flat annual increase of 2% per year, which is the [Federal Reserve's](https://www.investopedia.com/terms/f/federalreservesystem.asp) target inflation rate, or adjusting withdrawals based on actual inflation rates. The former method provides steady and predictable increases, while the latter method more effectively matches income to cost-of-living changes.

### Key Considerations for Applying the 4% Rule

While the 4% rule recommends maintaining a balanced portfolio of 50% common stocks and 50% intermediate-term Treasury bonds, some financial experts say that you should maintain a different allocation, such as reducing exposure to stocks in retirement in favor of a mix of cash, bonds, and stocks.

## Weighing the Pros and Cons of the 4% Rule

While following the 4% rule can make it more likely that your retirement savings will last the remainder of your life, it doesn’t guarantee it. The rule is based on the past performance of the markets, so it doesn't necessarily predict the future. What was considered a safe investment strategy in the past may not be a safe investment strategy in the future if market conditions change.

There are several scenarios in which the 4% rule might not work for a retiree. A severe or protracted market downturn can erode the value of a high-risk investment vehicle much faster than it can a typical retirement portfolio.

The 4% rule requires consistent adherence to be effective. Violating the rule one year to splurge on a major purchase can have severe consequences down the road, as this reduces the [principal](https://www.investopedia.com/terms/p/principal.asp), which directly impacts the [compound interest](https://www.investopedia.com/terms/c/compoundinterest.asp) that you will depend on for sustainability.

However, there are obvious benefits to the 4% rule. It is simple to follow and provides for a predictable, steady income. And if it is successful, the 4% rule will protect you from running short of funds in retirement.

Pros

*   It's simple to follow
    
*   Provides predictable, steady income
    
*   Protects you from running out of money in retirement
    

Cons

*   Requires strict adherence (doesn't respond to lifestyle changes)
    
*   Is based on a 'worst-case' scenario of portfolio performance
    
*   5%, not 4%, may be a more realistic number
    

## How the 4% Rule Stands Up During Economic Downturns

Financial planner Michael Kitces notes the 4% rule factors in severe downturns, like 1929, and it has done well during recent crises. As Kitces points out:

> The 2000 retiree is merely "in line" with the 1929 retiree, and doing better than the rest. And the 2008 retiree—even having started with the global financial crisis out of the gate—is _already_ doing far better than _any_ of these historical scenarios! In other words, while the tech crash and especially the global financial crisis were scary, they still haven’t been the kind of scenarios that spell outright doom for the 4% Rule.

Kitces advises against withdrawing more than 4%. Safety is a key element for retirees. So even if following the 4% rule may leave those who retire in calmer economic times "with a huge amount of money left over," Kitces notes, "in general, a 4% withdrawal rate is really quite modest relative to the long-term historical average return of almost 8% on a balanced (60/40) portfolio!"

Meantime, some experts—pointing to the recent low interest rates on bonds and savings—suggest that 3% might be a [safer withdrawal rate](https://www.investopedia.com/terms/s/safe-withdrawal-rate-swr-method.asp). The best strategy is to review your situation with a financial planner, starting with [how much you have saved](https://www.investopedia.com/articles/personal-finance/011216/average-retirement-savings-age-2016.asp), what your current investments are, and [when you plan to retire](https://www.investopedia.com/retirement/when-should-i-retire-pros-and-cons-different-ages).

> **Tip**
>
> Read about Investopedia's 10 Rules of Investing by picking up a copy of our special issue print edition.

## Does the 4% Rule Still Work?

The 4% rule was created to meet the financial needs of an average retiree over an approximately 30-year period, and as such is subject to adjustment depending on market conditions and a retiree's portfolio diversification, tax status, and expenses. Increasing the withdrawal rate to 5% allows for a more comfortable lifestyle, but also adds more risk. Reducing the rate to 3% can extend funds, but limits spending flexibility.

## How Long Will My Money Last Using the 4% Rule?

The 4% rule is intended to make your retirement savings last for approximately 30 years. In Bengen's original research, each 50-year time horizon sampled managed to sustain at least 33 years of withdraws at 4%. This rate of withdrawals means that most of the money used will be the [interest](https://www.investopedia.com/terms/c/compounding.asp) and [gains](https://www.investopedia.com/terms/g/gain.asp) on investments, not principal, assuming a reasonably healthy market [return](https://www.investopedia.com/terms/r/return.asp).

## Does the 4% Rule Work for Early Retirement?

The 4% rule allows for safe withdrawals for approximately 30 years, which means it may not provide sustainable income for individuals who retire early. If you're hoping to retire early or expect to keep working past age 65, your long-term financial needs [will be different](https://www.investopedia.com/articles/personal-finance/063014/6-signs-youre-ready-retire-early.asp).

## The Bottom Line

For most people, managing retirement savings is a balancing act. If you withdraw too much too fast, you'll risk running out of money. [Not withdrawing enough money](https://www.investopedia.com/articles/personal-finance/021816/when-its-time-stop-saving-retirement.asp#toc-when-to-start-spending) can deny you the full benefit of your hard-earned savings.

For those who want a rule of thumb to follow, the 4% rule is an imperfect but easy-to-use choice.

_**Correction—Sept. 24, 2024:** This article has been corrected to state that the 4% rule applies to approximately 30-year retirements and may not be sustainable for early retirements with a retirement horizon greater than 30 years._  

> **Article Sources**
>
> 1.  MarketWatch. "[The Inventor of the '4% Rule' Just Changed It](https://www.marketwatch.com/story/the-inventor-of-the-4-rule-just-changed-it-11603380557)."
>     
> 2.  Financial Advisor Magazine. "[How Much Is Enough?](https://www.fa-mag.com/news/how-much-is-enough-10496.html)"
>     
> 3.  Michael Kitces.com. "[How Has The 4% Rule Held Up Since the Tech Bubble and the 2008 Financial Crisis?](https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/)"