The 4 Percent Rule

What is the 4 percent rule?….Well great question!

The 4 percent rule is a common rule of thumb for figuring out how much you’ll be able to spend each year in retirement given a known quantity of retirement savings.  For example, if you have $1,000,000 in savings, the rule would say you can withdraw $40,000 each year.  A variant of this allows for increases over time to match inflation.  There have been a number of studies against historical performances of the S&P 500 that mostly validate the rule.

As with most things though, it’s not that simple.  For one reason, the rule doesn’t anticipate the long “retirement” timeline of an exityounger (apparently that’s a thing now).  The rule is generally used against a 30 year retirement window.  Even for someone retiring at a normal age, this may not be the best rule.  For a couple who may need 50 years of retirement income, you clearly get the issue.   Another concern comes from how it is tested.  If you have ever read financial sites or your own investment statements, how many times have you seen a disclaimer along the lines of “Past performance is no guarantee of future results”?  The stock market has been on a tear lately.  A win streak that must end at some point.  Interest rates have been at historic lows, how long will that keep up?  Retiring straight into another great recession is a risky at best proposition.

The point is, that a one size fits all rule does not work for all.  Each exityoung planner will need to evaluate certain things.  Here are some questions I’ve considered in developing my plan:

  1. How confident do we need to feel that we can take steady draws? (We can go with the flow a bit and take less some years)
  2. How long are we likely to live? (My family tends to outlive the actuaries by a good margin)
  3. How willing are we to change the plan midstream? (Pretty willing, definitely able)
  4. How confident are we that we could get jobs if needed later? (I think we could get jobs, not at previous levels but enough to help out)
  5. What kind of contributions do we intend to make to a child’s college and later expenses? (Some definitely, err, TBD)
  6. How willing are we to work longer to gain a greater sense of security? (depends on the day, we’ll have to see how the market goes over the next few years but every day I wonder if we could be more aggressive with our timeline)

Clearly a balancing act between safety, stress, cushion, and loosing precious years.

Because of our personal calculation we ended up very conservatively at 3.2% of retirement investments.  Said differently $80,000 of $2,500,000 is 3.2%.

What will drive you up or down from the 4% rule?  Let me know in the comments below.

A few articles I found valuable:


  1. I would disagree with number 6. Sense of security is a false concept when it comes to money. Real security comes from having family and community to share and rely upon. I ride the bus with low income people, who have to ride the bus and you know what I noticed about them? They are a community, they share their food and their time with each other (I do ease drop a little too much). What kind of security do they have? None in the sense that financial bloggers see as security, but they have each other.
    I would another bullet point, how low can you move your expenses? Can you pay off the house? Can you move down in cars to reduce insurance. My monthly fixed expenditures are $245, Annual tax and house and car insurance bills which I pay myself are $4000 dollars a year. Plus food and leisure which I have total control of how that money is spent. How much would I need to save for retirement with that kind of expense ratio?

    Hope those points are helpful. I liked the other bullet points I think they are useful.

    1. I do think about it a lot! How low can we go? How much is a day, week, month, year of your life worth? Then again, what is my community? Small family, I don’t know.

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