4% rule
A retirement withdrawal guideline suggesting that retirees can withdraw 4% of their portfolio in the first year, adjusting for inflation annually, with a high probability of the money lasting 30 years.
Example
“With $1 million in savings, the 4% rule allows $40,000 in annual withdrawals — enough to retire if expenses are $40,000/year.”
Memory Tip
4% rule = withdraw 4% per year. Need $1M? Multiply your annual expenses by 25.
Why It Matters
The 4% rule matters because it provides a practical framework for retirees to determine how much money they can safely spend each year without running out of funds during retirement. Understanding this guideline helps people plan their retirement savings goals and feel more confident about their financial security in their non-working years.
Common Misconception
Many people mistakenly believe the 4% rule guarantees their money will last exactly 30 years or that it works perfectly in all market conditions. In reality, the rule is based on historical data and probabilities, meaning there is still a significant chance of portfolio depletion if market returns are poor or if spending needs increase unexpectedly.
In Practice
A retiree with a $1 million portfolio would withdraw $40,000 in the first year of retirement. If inflation rises 2% that year, they would withdraw $40,800 in year two, and so on, adjusting each year for inflation while maintaining the same purchasing power throughout their retirement.
Etymology
Developed by financial planner William Bengen in 1994 based on historical market returns and inflation data.
Common Misspellings
Build a budget and track your spending
Related Terms
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See Also
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