How many of you have heard about the 4% retirement rule? I suspect that those who have looked into retirement have come across this rule in one way or another.

What is the 4% rule?

The 4% rule is the percentage of your portfolio that you can withdraw / year while keeping the balance intact. This is assuming that you stay invested in the market with balanced asset allocation.  According to William Bengen, CFP, 4% of your portfolio can be withdrawn from your portfolio (adjusted for inflation) while keeping your portfolio intact for 30 years with extremely high certainty.  This is assuming a 50/50 equities/bond asset mix during retirement.

Some Examples:

  • If I grew my portfolio to $1,000,000 by the time I retire, I can withdraw $ 1,000,000 x 4% = $40,000 / year until I draw my last breath. This will keep most/all of the capital intact to pass onto my heirs/beneficiaries.
  • Trying to figure out your portfolio value required for a certain lifestyle? If you needed $50k/year to survive during retirement, according to the 4% rule, you would need $50,000/4% = $1,250,000 in portfolio value.

My Scenario:

If i decide to retire early and live entirely on my portfolio, I would need a considerable portfolio size if I wanted to follow the 4% rule.

From my Retiring Early Series, I determined that we would need around $45,000 / year to live comfortably (in todays dollars). If we retire before CPP/pension benefits kick in, we would need to depend on a portfolio size of $45,000/4% = $1,125,000. Looks like we have a little ways to go. :)

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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6 years ago

What I would like to know is an amount of money to go for so, I could drop down to part time. Full time seems to suck up so much life.

Neil Hampshire
11 years ago

If you follow Robert Prechter’s Elliott Wave theory, 4% rule would not work since we are in a bear market supercycle, and we are heading back down to Dow 4000 at the very least and may even go as far as Dow 1000. It would be best to have all your money in US Treasuries at 4%. We are going through a Japanese style deflation and will be best to have zero equities.

Sid Edwards Pensioner
11 years ago

The 4% rule means that you can have a 30-40 yr life of retirement. The rules
covering RRIF’s with the increase from 5% up to 20% per year means that by 90 yrs of age you are out of money.The only way around this is that you have an equal amount in registered and non registered accounts. With many people
expected to live to be 100yrs. or more there will be a lot of people living a very
meagre life unless they have a lot of money or a well funded DB plan or be an
ex Govt. employee.The fact that RRISP’s or RRIF’s do not get any assistance
from the dividend tax credit that DB’s get.This means that I am not as good as a Government employee or amember of a DB or Insurance Company.
If these problems are not addressed in the near future we will have quite a mess on our hands Pensioner

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Ms Save Money
12 years ago

Hey this is very interesting. I was a finance major in college – but I don’t remember learning about the 4% rule for retirement. Would anyone have a peer reviewed article on this to recommend to me? Thanks!

Lewis Empire
14 years ago

Why would you want to have the $1,000,000 intact when you die? Let the life insurance make the kids happy and have fun with the rest!

14 years ago

Ed, there are some great articles at the link below which talk about the 4% rule.

Basically they assume you are using your capital but the probabilities they come up with are based on using Monte Carlo simulations using US stock returns and inflation over the last 85 years or so.

It’s more of a guideline or starting point than a solid “rule”.

Ed Rempel
14 years ago

Hi FT,

Maybe the difference is whether or not you use up the principal. The 5.5% rule assumes you use up the principal over 40 years. That is close to indefinite, but not quite the same. If you assume you only use the profits, then a 4% rule possibly assumes a 7% return and 3% inflation.

We would normally assume a conservative 8% return, so with 3% inflation, that would be a 5% rule (instead of a 5.5% rule that uses up the prinical).