What is the 4% rule and where does it come from?

The 4% rule comes from the Trinity Study (1998), which analyzed historical data to find a sustainable withdrawal rate. It states that withdrawing 4% of your initial portfolio in year one, then adjusting for inflation each year, has historically survived 95% of 30-year periods.

Is 4% still safe for early retirees?

For early retirees with 40-50+ year horizons, many experts recommend a more conservative 3.25-3.5% withdrawal rate. The original study only covered 30-year periods, and current market valuations may lead to lower future returns.

What is sequence of returns risk?

Sequence of returns risk is the danger of experiencing poor market returns early in retirement. If you withdraw from a declining portfolio, you sell more shares to maintain income, leaving less to recover when markets rebound. This can deplete your portfolio even if long-term average returns are good.

Should I withdraw 4% of my current balance each year?

No. The 4% rule uses your initial retirement portfolio value. You withdraw 4% of that starting amount, then increase it by inflation each year—regardless of market performance. Some prefer percentage-of-portfolio strategies, which adjust spending to market conditions.

What is the guardrails withdrawal strategy?

The guardrails approach sets upper and lower bounds on spending. If your portfolio drops significantly, you reduce withdrawals (skip discretionary spending). If it grows substantially, you give yourself a raise. This flexibility dramatically improves portfolio survival rates.

How does inflation affect the 4% rule?

Inflation is built into the 4% rule—you increase withdrawals by the inflation rate each year to maintain purchasing power. However, periods of unexpectedly high inflation (like recent years) can stress portfolios more than historical averages suggest.

The 4% Rule Explained:
Is It Safe in 2025?

The "4% Rule" is the bedrock of the FIRE movement. But originally published in 1994, does it hold up against modern inflation and market valuations? Let's look at the data.

What is the 4% Rule?

The rule comes from the Trinity Study (1998), which looked at historical stock/bond portfolios to see how often they would last for 30 years given various withdrawal rates.

The Conclusion: A portfolio of 50% stocks and 50% bonds survived 95% of the time over 30-year periods when the retiree withdrew 4% of the initial balance, adjusted annually for inflation.

Key Distinction

The 4% is based on your initial portfolio value. If you start with $1M, you withdraw $40k. In year 2, if inflation was 3%, you withdraw $41,200—regardless of whether the market is up or down.

Portfolio Survival Scenarios

Impact of initial withdrawal rate on portfolio longevity (Start: $1M)

4% balances safety and spending power

A 5% withdrawal rate risks depleting your portfolio within 30 years, while 3% leaves a large surplus. The 4% rule is widely considered the safe "sweet spot."

The Problem with 4% in 2025

While 4% worked historically, many experts argue it might be too aggressive for early retirees today. Why?

Longer Horizons: The Trinity Study looked at 30 years. If you retire at 35, you might need your money to last 50 or 60 years.
Valuations: When stock market valuations (CAPE ratios) are high, future returns tend to be lower.
Sequence of Returns Risk: If the market crashes right after you retire (like in 2000 or 2008), depleting your portfolio early can make it impossible to recover, even if the market rebounds later.

Better Alternatives: Variable Withdrawal Rates

Instead of a rigid "blind" withdrawal, modern FIRE strategies suggest being dynamic.

1. The "Guardrails" Approach

If the market drops significantly, you cut your spending (e.g., skip the vacation, eat out less). If the market booms, you give yourself a raise. This flexibility massively increases your portfolio's success rate.

2. Lower the Initial Rate

Many cautious early retirees target a 3.25% to 3.5% withdrawal rate. This virtually guarantees capital preservation across almost all historical scenarios, even extended bear markets.

Simulate Your Safe Rate

Reading about it is one thing; seeing it is another. We've built these scenarios directly into our calculator.

Go to the calculator, expand the advanced options (or check the "Simulation Mode" if available), and switch between "Deterministic" (Fixed return) and "Monte Carlo" (Randomized) to see how volatility impacts your success chance.

Conclusion

The 4% rule is a fantastic rule of thumb for planning, but a dangerous rule of law for execution. Use it to set your savings target, but remain flexible once you actually pull the trigger on retirement.

Frequently Asked Questions

Written by The InvestingFIRE Team

We are a group of financial data enthusiasts and early retirees dedicated to building the most accurate FIRE tools on the web. Our goal is to replace guesswork with math.