Guide · Use with the Retirement Runway Calculator
The 4% Rule: What It Assumes and When It Breaks
The 4% rule says you can spend 4% of your savings in the first year of retirement, raise that amount with inflation every year after, and expect the money to last about 30 years. It is a useful starting point and the basis of the calculator's Monthly Income Gap. It also rests on assumptions that won't fit everyone. This guide explains both.
Where the rule comes from
In October 1994, financial planner William P. Bengen published "Determining Withdrawal Rates Using Historical Data" in the Journal of Financial Planning. He tested US stock, bond and inflation returns from 1926 onward, retiring a hypothetical client in each starting year. He found that a first-year withdrawal of about 4% of the starting balance, then adjusted for inflation each year, lasted at least 30 years across the historical periods he tested. He described 5% as risky, and supported holding between 50% and 75% in stocks (Bengen, 1994, reprinted by the FPA).
A 1998 study in the AAII Journal, often called the Trinity study, tested withdrawal rates of 3% to 12% over 15 to 30 years using returns from 1926 to 1995. It found that inflation-adjusted withdrawals of 3% to 4% produced high success rates for portfolios mostly in stocks. It also noted that it ignored taxes and transaction costs (AAII Journal, February 1998).
What the rule actually says
- Year one: withdraw 4% of your savings on the day you retire.
- Every later year: withdraw the same dollar amount, raised by the year's inflation. You don't recalculate 4% of whatever the balance is now.
- The aim: money that lasts around 30 years, with a high chance based on US history. It is not a guarantee, and it isn't designed to leave the balance untouched.
Monthly amount = first-year withdrawal ÷ 12
How the calculator uses it
The Retirement Runway Calculator projects your savings to your retirement age, takes 4% of that total (3.5% if you turn on FIRE mode), and divides by 12. It then takes tax off the pre-tax 401(k) share, adds Social Security after tax, and compares the total with your target spending. Because you enter a return after inflation, every figure is in today's dollars, which matches the rule's idea of a spending amount that keeps pace with prices.
Worked example
This is the calculator's own example: a 45-year-old retiring at 67 with $100,000 saved, $600 a month added, a 5% real return, a $4,500 monthly target, Social Security claimed at 67 and a 12% tax rate.
| Step | 4% rule | FIRE mode (3.5%) |
|---|---|---|
| Savings at 67 | $569,764 | $569,764 |
| Monthly withdrawal before tax | $569,764 × 4% ÷ 12 = $1,899.21 | $569,764 × 3.5% ÷ 12 = $1,661.81 |
| Withdrawal after tax (12% on the 80% pre-tax share) | $1,716.89 | $1,502.28 |
| Social Security after tax | $2,618.94 | $2,631.14 |
| Monthly income gap vs $4,500 | −$164.17 | −$366.59 |
Social Security after tax is slightly higher in FIRE mode because the smaller withdrawal makes less of the benefit taxable. Either way, this plan falls short of its target on the 4% rule. The calculator's Runway result tells a different story, explained next.
Why the runway can disagree
The Runway result asks a different question: if you spend your full target every year and earn exactly your expected return, when does the money run out? In the example, the savings need to supply $24,970 a year before tax, while a 5% return earns about $28,488 in the first year. The balance barely falls, so the runway shows 100+.
The 4% rule is built to survive bad markets; the runway assumes a smooth average. If the runway looks fine but the gap is negative, your plan depends on returns not disappointing. In the same example, cutting the return assumption to 3% shortens the runway to age 90, and raising spending to $6,500 a month ends it at 83.
When the rule breaks
Bad returns early in retirement
The order of returns matters once you are withdrawing. Here is a hypothetical $500,000 portfolio, with $20,000 taken out at the start of each year and the same five yearly returns in two different orders:
| Year | Return, bad years first | Balance | Return, good years first | Balance |
|---|---|---|---|---|
| 1 | −20% | $384,000 | +25% | $600,000 |
| 2 | +5% | $382,200 | +5% | $609,000 |
| 3 | +5% | $380,310 | +5% | $618,450 |
| 4 | +5% | $378,326 | +5% | $628,373 |
| 5 | +25% | $447,907 | −20% | $486,698 |
Without withdrawals, both orders would end at the same $578,813. With withdrawals, the bad-years-first retiree has $38,791 less after five years, purely because of timing. The calculator assumes the same return every year, so it can't show this risk. That is why the 4% figure sits well below the average return.
A retirement much longer than 30 years
Bengen's test period was 30 years. Someone retiring at 50 may need money for 40 years or more, which is why the calculator offers a 3.5% FIRE mode.
Fees, taxes and a cautious portfolio
The studies ignored taxes and costs, and they assumed a large share in stocks. A 1% yearly fee, or a portfolio held mostly in cash, leaves less room for withdrawals.
Spending that doesn't stay flat
Real spending is often lumpy: a new roof, a car, health costs. A plan with no spare margin can fail even if average returns are fine.
Common mistakes
- Taking 4% of the current balance every year. That is a different strategy. It can never fully run out, but your income would fall sharply after a bad year.
- Forgetting tax. Withdrawals from a traditional 401(k) are taxable income. The calculator subtracts tax; a quick mental 4% doesn't.
- Entering a nominal return. The calculator needs a return after inflation. Entering 7% when inflation is 3% makes the plan look far better than it is.
- Treating the rule as a promise. It describes what would have worked in past US markets. Future returns may be lower or more volatile.
- Never revisiting it. Many retirees review their withdrawals each year and trim spending after poor markets.
Questions people ask
Is 4% too high or too low today?
Nobody knows future returns, so researchers and planners disagree. What the history shows is that the rate you can sustain depends on how long you need the money, how it is invested, your costs, and how flexible your spending is.
Does the 4% include Social Security?
No. The 4% applies to your savings only. The calculator adds Social Security separately, which is why a small portfolio can still close a gap when the benefit is large.
What if my gap is positive?
Then 4% of your projected savings plus Social Security covers your target, on the calculator's assumptions. It is still worth testing a lower return to see how much margin you have.
Related tools and guides
- Retirement Runway Calculator: test your own numbers, then try 3.5% FIRE mode and a lower return.
- When to claim Social Security: a larger benefit reduces how much your savings must supply.
- Compound interest explained: how the savings figure at retirement is built up.
Sources
- William P. Bengen, "Determining Withdrawal Rates Using Historical Data", Journal of Financial Planning, October 1994 (FPA reprint)
- "Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable", AAII Journal, February 1998
The returns in the sequence table are hypothetical, chosen to show the effect of timing. They are not forecasts. This guide explains a planning rule of thumb. It is not financial or tax advice. How we check our calculations.