Safe withdrawal rate (4% rule)
Also called sustainable withdrawal rate
The share of a retirement portfolio that can be withdrawn in the first year, then raised with inflation, with a low chance of running out of money.
What it means
A safe withdrawal rate is an estimate of how much a retiree can take from savings each year without exhausting them over a set period. The best-known version, the 4% rule, came from studies in the 1990s that tested U.S. stock and bond returns across many historical periods. They found that withdrawing 4% of the starting balance in year one, then adjusting that dollar amount for inflation each year, lasted about 30 years in most of those periods.
The 4% rule is a rule of thumb, not a guarantee. It rests on past U.S. market returns, a specific stock and bond mix and a 30-year horizon, and it ignores taxes and fees. Longer retirements, lower future returns or a bad run of early returns can make 4% too high, while flexible spending or other income can make a higher rate workable.
Formula
First-year withdrawal = Starting portfolio × Withdrawal rate
- Starting portfolio = balance at retirement
- Withdrawal rate = chosen rate as a decimal (4% = 0.04)
- Later withdrawals = prior year’s amount × (1 + inflation)
Example
Suppose a retiree has $1,000,000. Under the 4% rule they would withdraw $40,000 in the first year. If inflation that year is 3%, the second-year withdrawal rises to $41,200, regardless of how the portfolio performed.
How it’s used
- Estimating how much savings a retirement budget requires
- Setting a starting retirement paycheck from a portfolio
- Stress-testing an early retirement plan
Strengths and weaknesses
Strengths
- Simple starting point that is easy to calculate
- Grounded in a long span of historical data
- Gives steady, inflation-adjusted income
Weaknesses
- Based on past U.S. returns that may not repeat
- Designed for about 30 years, not longer retirements
- Rigid spending ignores market conditions
- Ignores taxes, fees and changing spending needs
Good to know
- Many retirees use flexible rules, such as trimming withdrawals after a bad year, rather than a fixed inflation-adjusted amount.
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Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.