The 4% Rule: How Retirement Withdrawals Actually Work

Last updated: September 2, 2026

The 4% Rule is a retirement-planning guideline based on historical market data. It is not a guarantee.

The basic idea is simple:

1. In the first year of retirement, withdraw about 4% of the portfolio’s starting value.
2. In later years, adjust that dollar amount for inflation.

For example, a $1,000,000 portfolio would produce a first-year withdrawal of $40,000 under the 4% starting-rate assumption.

If inflation were 3% the next year, the withdrawal would rise to $41,200.

That does not mean taking 4% of the portfolio’s current balance every year. That is a different withdrawal method.

The 4% Rule can be useful for learning retirement math, but it does not account for your taxes, investment fees, Social Security, pension income, healthcare costs, spending changes, or how long you will live.

Key Takeaways

• The classic 4% Rule uses 4% of the starting portfolio in Year 1.
• Later withdrawals are normally adjusted for inflation.
• It is a historical guideline, not a promise that money will last 30 years.
• The order of investment returns matters when money is being withdrawn.
• Taxes and investment fees can reduce the amount available for spending.
• Social Security and pensions are separate from the investment portfolio.
• A 4% calculation can estimate an implied portfolio size, but it does not tell you exactly how much you personally need to retire.
• Newer retirement research uses different assumptions and can produce starting rates above or below 4%.

What Is the 4% Rule?

The 4% Rule is a way to think about withdrawals from an investment portfolio during retirement.

Under the classic version:

• You calculate 4% of the portfolio’s value at the start of retirement.
• That becomes the first year’s withdrawal.
• In later years, you adjust the previous dollar withdrawal for inflation.

Suppose retirement starts with $1,000,000.

$1,000,000 × 4% = $40,000

The first-year portfolio withdrawal would be $40,000.

The important part is what happens next.

You do not automatically calculate 4% of the portfolio again in Year 2.

Instead, the classic rule adjusts the $40,000 for inflation.

That difference is easy to miss, but it changes the math significantly.

The Rich Guy Math: How the 4% Calculation Works

The basic calculation can be used in two directions.

Starting with a portfolio

Starting with a desired first-year withdrawal

Use:

Implied portfolio = First-year portfolio withdrawal ÷ 0.04

Examples:

$20,000 ÷ 0.04 = $500,000

$40,000 ÷ 0.04 = $1,000,000

$60,000 ÷ 0.04 = $1,500,000

You may also hear this called the 25x rule, because dividing by 0.04 gives the same result as multiplying by 25.

For example:

$40,000 × 25 = $1,000,000

But this is only arithmetic based on a 4% assumption.

It does not prove that $1,000,000 is enough for a particular retirement.

A person may also receive Social Security, a pension, employment income, or other income. Taxes, healthcare costs, housing costs, investment fees, and retirement length also matter.

For a broader estimate that includes savings, contributions, time, and assumed returns, use the Retirement Calculator.

A Simple Inflation Example

Suppose:

• Starting portfolio: $1,000,000
• Year 1 withdrawal: $40,000
• Hypothetical inflation: 3%

The Year 2 withdrawal would be:

$40,000 × 1.03 = $41,200

The $41,200 is not automatically 4% of the portfolio’s Year 2 balance.

If the portfolio were worth $1,050,000:

$41,200 ÷ $1,050,000 ≈ 3.92%

If the portfolio were worth $950,000:

$41,200 ÷ $950,000 ≈ 4.34%

The withdrawal is being adjusted for inflation while the portfolio itself is moving up or down with investment results.

That is the basic structure of the classic rule.

What happens over many years?

If a $40,000 first-year withdrawal were increased by exactly 3% every year, the Year 30 withdrawal would be about:

$40,000 × 1.03^29 = $94,263

Why 29 inflation adjustments?

Because $40,000 is already the Year 1 amount. Moving from Year 1 to Year 30 involves 29 annual increases.

This is only an illustration. Inflation will not be exactly 3% every year, and a retiree’s personal expenses will not necessarily change at the same rate as a broad inflation index.

Where Did the 4% Rule Come From?

The rule is closely associated with financial planner William Bengen’s 1994 article, “Determining Withdrawal Rates Using Historical Data,” published in the Journal of Financial Planning.

Bengen looked at historical U.S. stock and bond returns and asked a practical question:

How large could a starting retirement withdrawal have been without exhausting the portfolio during difficult historical periods?

His analysis examined retirement periods lasting roughly 30 years and used inflation-adjusted withdrawals.

The work is important because it focused on the sequence of real historical returns rather than assuming the same average investment return every year.

But historical survival is not the same as a future guarantee.

The next 30 years do not have to look like any previous 30-year period.

Source: William Bengen, “Determining Withdrawal Rates Using Historical Data,” Journal of Financial Planning, 1994

What Was the Trinity Study?

A later study by Philip Cooley, Carl Hubbard, and Daniel Walz became known as the Trinity Study.

Their 1998 research tested:

• different starting withdrawal rates,
• different mixes of stocks and bonds,
• and retirement periods of 15, 20, 25, and 30 years.

The withdrawal rates tested ranged from 3% to 12%.

The important lesson is that there was no single “success rate” for the 4% Rule.

The result depended on:

• the stock/bond mix,
• the withdrawal rate,
• the retirement length,
• inflation,
• and the historical period being tested.

So a statement such as:

“The 4% Rule has a 95% success rate”

is incomplete unless the person also explains the exact assumptions behind that number.

Source: AAII, “Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable”

What Does “Success” Mean in Retirement Research?

This word can sound stronger than it really is.

In withdrawal studies, “success” often means that the portfolio was not exhausted before the end of the period being tested.

That does not necessarily mean:

• the retiree had a comfortable lifestyle,
• healthcare costs were fully covered,
• a large inheritance remained,
• spending never had to change,
• or the strategy was the best possible strategy.

A study’s definition of success matters just as much as its percentage result.

Why the 4% Rule Is Not a Guarantee

The 4% Rule is based on assumptions.

Change the assumptions, and the result can change.

Important variables include:

• future stock and bond returns,
• inflation,
• retirement length,
• investment fees,
• taxes,
• portfolio mix,
• spending changes,
• and the order in which good and bad investment years occur.

Historical research tells us what happened in the past.

It does not tell us exactly what will happen to a person retiring today.

The Rich Guy Math: Sequence of Returns Risk

Sequence of returns risk simply means that the order of investment gains and losses matters when money is being withdrawn.

Here is a simple example.

Both hypothetical portfolios:

• start with $1,000,000,
• withdraw $40,000 at the end of each year,
• experience the same five annual returns,
• and do not adjust the $40,000 withdrawal for inflation.

The only difference is the order of the returns.

Portfolio A: Bad years come first

Returns:

-15%, -5%, +8%, +10%, +20%

Portfolio B: Good years come first

Returns:

+20%, +10%, +8%, -5%, -15%

The ending balances differ by about:

$971,616 − $899,175 = $72,441

Same returns.

Same withdrawals.

Different order.

Why?

When losses happen early, the withdrawal is taken from a smaller portfolio. That leaves less money invested for later recoveries.

For the math behind how gains and losses build on earlier balances, see How Compounding Works.

How Inflation Affects Withdrawals

The classic 4% framework tries to keep the withdrawal’s purchasing power roughly stable by adjusting the dollar amount for inflation.

The Consumer Price Index, published by the Bureau of Labor Statistics, is one common measure of inflation.

But your personal expenses may not move exactly like CPI.

For example:

• healthcare,
• housing,
• food,
• travel,
• insurance,
• and taxes

can all change at different rates.

That is another reason the 4% Rule should be treated as a model rather than a personal spending forecast.

How Retirement Length Changes the Math

Bengen’s classic work is usually discussed in the context of a roughly 30-year retirement.

But a retirement does not automatically last 30 years.

A longer withdrawal period gives the portfolio more years in which it must support spending.

A shorter period gives it fewer years.

That sounds obvious, but it is one of the most important assumptions behind any withdrawal-rate calculation.

There is no universal rule saying:

• use 4% for 30 years,
• use a particular lower percentage for 40 years,
• or use a higher percentage if you are older.

The correct result depends on the full set of assumptions.

Asset Allocation Matters Too

Historical withdrawal studies tested different mixes of stocks and bonds.

Different mixes produced different results because stocks and bonds have different return and volatility patterns.

That does not mean a historical allocation should automatically become a recommendation for today’s retiree.

Portfolio choice also depends on factors such as:

• other income,
• ability to tolerate losses,
• time horizon,
• spending flexibility,
• taxes,
• liquidity needs,
• and personal goals.

Historical performance does not guarantee future results.

If you are still learning the difference between diversified funds and single-company investments, see ETFs vs. Individual Stocks.

How Fees Affect Retirement Withdrawals

Investment fees reduce the amount of money left in a portfolio to earn future returns.

Examples can include:

• fund expense ratios,
• advisory fees,
• account fees,
• commissions,
• and other transaction costs.

A historical return shown before costs will not be the same as the investor’s return after all costs.

This matters even when the annual fee looks small because the fee reduces the amount that remains invested year after year.

The SEC explains this effect in its investor bulletin on fees and expenses:

Investor.gov — How Fees and Expenses Affect Your Investment Portfolio

How Taxes Affect What You Can Spend

A $40,000 portfolio withdrawal does not always mean $40,000 is available to spend after taxes.

The result depends on where the money comes from.

Traditional IRA or traditional 401(k)

Taxable portions of distributions are generally included in ordinary income.

Roth IRA

Qualified Roth IRA distributions can generally be tax-free, but IRS rules determine whether a distribution is qualified.

Taxable investment account

Selling investments can create capital gains or losses. Only the taxable gain portion is treated as a capital gain; the entire amount withdrawn is not automatically taxable income.

Because tax treatment varies by account, cost basis, other income, and current law, a retirement-withdrawal calculation should not assume that every dollar withdrawn has the same tax result.

See IRS Publication 590-B for IRA distribution rules.

Social Security, Pensions, and Other Income

The 4% Rule is about portfolio withdrawals.

It is not a formula for total retirement income. Other income sources can exist outside the portfolio; for an educational overview, see Passive Income Ideas.

Suppose someone wants $64,000 per year to cover spending and receives $24,000 from Social Security.

The amount still needed from the portfolio would be:

$64,000 − $24,000 = $40,000

Under a simple 4% starting-rate assumption:

$40,000 ÷ 0.04 = $1,000,000

The $1,000,000 is the portfolio size implied by the $40,000 portfolio withdrawal—not by the full $64,000 spending amount.

Again, this is only arithmetic. It does not prove that the portfolio is sufficient.

For the broader process of building net worth before retirement, see Wealth Building Strategies.

What Does Current 2026 Research Say?

Newer research does not make the 4% Rule disappear. It simply uses different data and assumptions.

Morningstar’s article for 2026 reports a 3.9% base-case starting withdrawal rate for a specific model.

That model assumes:

• a 30-year retirement,
• inflation-adjusted spending,
• a 90% probability of funds remaining at the end,
• and Morningstar’s forward-looking capital-market assumptions.

Morningstar says the base case applies to portfolios with roughly 30% to 50% in equities under its model.

This does not mean:

“3.9% is the new 4% Rule.”

It means one research model produced 3.9% under one set of assumptions.

A different retirement length, portfolio, spending method, or probability target can produce a different number.

Source: Morningstar — What’s a Safe Retirement Withdrawal Rate for 2026?

What Does “Safe Withdrawal Rate” Really Mean?

The phrase safe withdrawal rate is common in retirement research.

But “safe” does not mean guaranteed.

A withdrawal rate only has meaning when you know the assumptions behind it.

At minimum, ask:

• What portfolio was tested?
• How long was the retirement?
• Were withdrawals adjusted for inflation?
• Were fees included?
• Were taxes included?
• What returns were used?
• What counted as success?
• Was the test historical or forward-looking?
• What probability of success was required?

Without that information, a statement such as “3.9% is safe” or “4% is safe” is missing important context.

Fixed Real Withdrawals vs. Taking a Percentage Each Year

These are different strategies.

Classic 4% Rule approach

The retiree:

1. calculates a first-year dollar withdrawal,
2. then adjusts that dollar amount for inflation.

The withdrawal can become a larger or smaller percentage of the current portfolio as the market moves.

Percentage-of-current-balance approach

The retiree takes a set percentage of the portfolio’s current value each year.

For example:

Current portfolio × 4%

If the portfolio falls, the dollar withdrawal falls.

If the portfolio rises, the dollar withdrawal rises.

That makes spending less predictable, but it is mathematically different from the classic 4% Rule.

Flexible Spending Strategies

Some retirement strategies allow withdrawals to change with portfolio conditions.

Examples include:

• guardrail methods,
• floor-and-ceiling methods,
• and other dynamic spending rules.

The basic trade-off is simple:

More spending flexibility can reduce pressure on the portfolio during bad markets, but it also means retirement spending is less predictable.

Different strategies use different formulas.

There is no single flexible method that is automatically best for everyone.

Required Minimum Distributions Are Different

Required minimum distributions, or RMDs, are tax rules.

The 4% Rule is a planning guideline.

They are not the same thing.

Under current federal law, many traditional retirement-account owners generally begin RMDs at age 73. SECURE 2.0 raises the applicable age to 75 for later cohorts under the law’s phase-in rules.

Workplace plans can have additional rules, including situations where RMDs may be delayed until retirement.

Roth IRAs do not require RMDs from the original owner during life under current rules.

RMD calculations generally use the prior year-end account balance and an IRS life-expectancy factor.

The 4% Rule does not override a legal RMD requirement.

See:

IRS — Required Minimum Distributions

Common 4% Rule Mistakes

Mistake 1: Taking 4% of the current balance every year and calling that the classic rule.
That is a different withdrawal method.

Mistake 2: Treating 4% as guaranteed.
It is based on historical research and assumptions.

Mistake 3: Ignoring investment fees.
Fees reduce the portfolio value available to support future withdrawals.

Mistake 4: Ignoring taxes.
Different accounts can produce different after-tax results.

Mistake 5: Ignoring Social Security or pension income.
The portfolio may not need to fund all retirement spending.

Mistake 6: Treating 30 years as everyone’s retirement length.
Actual retirement length is uncertain.

Mistake 7: Forgetting inflation.
The classic rule adjusts withdrawals to maintain purchasing power.

Mistake 8: Treating a historical success rate like a future probability.
A backtest describes what happened in the tested periods. It does not know the future.

Mistake 9: Using age alone to choose a portfolio.
Age is only one factor.

Mistake 10: Treating the 25x calculation as a complete retirement plan.
It is only the inverse of a 4% starting-rate assumption.

When the 4% Rule Is Useful

The 4% Rule can still be useful as:

• a quick way to understand first-year withdrawal math,
• a rough benchmark for comparing portfolio size with portfolio-funded spending,
• a starting point for learning how inflation affects withdrawals,
• and a reference point for comparing other retirement-spending methods.

Its value is mainly educational.

It gives you a number to test.

It does not give you a personalized retirement answer.

Readers who are still learning how investment accounts and small-dollar investing work can also see How to Start Investing With $100.

What the 4% Rule Cannot Tell You

The rule cannot know:

• future investment returns,
• your exact retirement length,
• your personal inflation rate,
• future healthcare costs,
• future tax law,
• your exact Social Security benefits,
• how your spending will change,
• which portfolio is right for you,
• or whether future markets will be worse than the historical periods used in earlier studies.

Those are major limitations.

The Bottom Line

The 4% Rule is best understood as a retirement-math framework, not a promise.

It starts with a simple calculation:

Starting portfolio × 4% = First-year portfolio withdrawal

Then the classic method adjusts that dollar withdrawal for inflation.

The hard part is everything the formula cannot predict:

• market returns,
• inflation,
• taxes,
• fees,
• retirement length,
• spending changes,
• and the order in which good and bad investment years arrive.

The Rich Guy Math approach is simple:

Use the 4% Rule to understand the math. Do not confuse the math with a guarantee.

Sources and References

• William P. Bengen — Determining Withdrawal Rates Using Historical Data, Journal of Financial Planning, 1994
• AAII — Retirement Savings: Choosing a Sustainable Withdrawal Rate
• Morningstar — What’s a Safe Retirement Withdrawal Rate for 2026?
• Investor.gov — How Fees and Expenses Affect Your Investment Portfolio
• IRS — Required Minimum Distributions
• IRS Publication 590-B — Distributions From IRAs
• Bureau of Labor Statistics — Consumer Price Index

Editorial Disclosure

The Rich Guy Math provides general financial education and calculation tools. Retirement withdrawal strategies are discussed for educational and illustrative purposes only. We do not provide individualized financial, investment, tax, legal, or accounting advice. Historical results and modeled withdrawal rates do not guarantee future outcomes.

About the Author

Max Fonji is the founder and financial education writer behind The Rich Guy Math. He researches and explains personal-finance concepts using calculations, authoritative sources, practical examples, and plain language. His work focuses on helping readers understand how money decisions work rather than providing individualized financial advice.