What is the 4% rule for retirement?

The 4% rule says you can withdraw 4% of your savings in your first year of retirement, then raise that amount each year for inflation, and your money has a good chance of lasting 30 years. Flip it around and you get your target: about 25 times the yearly amount you need from savings.

How the rule works

In the first year of retirement, withdraw 4% of your savings. Each later year, withdraw the same dollar amount adjusted for inflation, no matter what the market did.

Where it comes from

The rule came from 1990s research that tested past US stock and bond returns. It looked for a starting withdrawal that would have lasted at least 30 years through every period studied, using a mix of stocks and bonds.

It is a range, not a law

FINRA notes that expert opinion on withdrawal rates tends to cluster between 3% and 5%. Your right number depends on how long you might live, how you invest and how flexible your spending is.

The 25× shortcut

Because 1 ÷ 4% = 25, multiplying your yearly gap by 25 gives a savings target. Multiply by about 29 for a 3.5% rate, or 33 for 3%.

Using the rule to set a goal

Start with what you'll spend each year in retirement. Subtract the income you'll get without touching savings, such as Social Security or a pension. What is left is your gap. Multiply it by 25.

Work in today's dollars. The rule already builds in inflation raises, so you don't need to guess what prices will be in 30 years. Just compare your target with your savings, also in today's dollars, and adjust your saving rate if you're behind.

Why the first years matter most

The biggest danger is a large market drop in the first few years of retirement. When you sell investments to live on while prices are low, you sell more shares to get the same cash, and those shares are not there to recover later. This is called sequence of returns risk.

Two retirees with the same average return can end up very differently, depending on whether the bad years come early or late. That is why FINRA suggests withdrawing conservatively at the start of retirement and being ready to adjust if your portfolio falls.

Where the 4% rule can fall short

It assumes about 30 years. Retiring at 50 could mean 40 or more years of withdrawals, which calls for a lower starting rate. It also assumes a fairly balanced mix of stocks and bonds. All cash or all bonds would likely not have supported 4% with inflation raises.

It ignores fees. Paying 1% a year in fees takes a big bite out of a 4% withdrawal, so low-cost index funds matter even more in retirement. And it is based on past US returns, which may not repeat.

Flexible ways to use it

Few retirees follow the rule exactly. A common approach is to start at 4% and set simple guardrails: skip the inflation raise in a year your portfolio falls, and allow a small extra raise after strong years.

Another is to cover your must-pay bills with steady income, like Social Security, and use the portfolio for the rest. Waiting to claim Social Security, up to 70, makes that steady part bigger and leaves less pressure on your savings.

Required withdrawals later on

From age 73, the IRS generally requires you to take minimum withdrawals each year from traditional IRAs and 401(k)s. These required minimum distributions can be larger than 4% in your late 70s and beyond.

You don't have to spend that money. You can move what you don't need into a regular brokerage account or savings after paying the tax. Roth IRAs don't have required withdrawals while the owner is alive.