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A Practical View on the 4% Rule: Guest Post from John Ryan


I’m delighted to share the following guest post from John Ryan, of MoneyTime, where John blogs about finance related topics, ranging from investment to real estate to frugal living and financial independence.

In the February 1998 issue of the Journal of the American Association of Individual Investors an article called “Retirement Spending: Choosing a Sustainable Withdrawal Rate,” by Philip L. Cooley, Carl M. Hubbard, and Daniel T. Walz (all professors at Trinity University in Texas), appeared.  It has been nicknamed, the Trinity Study, and the central finding was using an annual 4% withdrawal rate, adjusted for inflation, a lump sum amount could be expected to last at least 30 years.  They verified this by taking a hypothetical portfolio through a simulation of market conditions over various periods with different withdrawal policies and looking at the percentage of simulations had anything left at the end of it.  The 4% policy survived in 95% of the simulations, leading to the conclusion that this is a safe amount to retire on.  (EDIT:  For completeness, after this post went live I read a great post by Michael James which clarified the 4% was originated by William Bergen in 1994)

You can go to FIRECalc and run the simulation yourself.  In the Start Here box on the right hand side of the page, enter  your starting annual spending, your portfolio (savings) and the number of years you want to run the simulation for.  Each of the colored lines in the resulting graph is one simulation, and you can read the results. For my test run, using the default amounts, the portfolio survived for 30 years 94.8% of the time. has another nice calculator.

Related:  When Can I Retire?

Adjusted for Inflation?

Where they say take 4% of your portfolio as a withdrawal rate, what that means is you’ll increase every year by the inflation rate, which would mean your purchasing power would stay the same each year.  So, if your spending was $30,000 in the first year, and inflation was 1.2%, the next year you could withdraw $30,306 ($30,000 + $30,000 * 1.2%).  You would do this every year.

The idea behind this is simply that money in the future will buy less than money today does – just as money in the past would buy more than it does today.

What Does the Survival and Failure Mean?

Survival just means that there is ANY money left at the end, failure means it runs out before the 30 years is up.

What does my annual spending include?

Basically your annual spending is just anything that you’d have to pay – rent, food, entertainment, travel, etc.  You add up all your spending, deduct any extra income you’ll get (like a pension) and the remaining amount is what your retirement savings needs to provide.  Divide it by 4%, and that will tell you whether you have enough or not.

But What About the 5% of Times it Fails?!?!

It’s totally reasonable to not be excited about a 1 in 20 chance of eating dog food.  The issue is, when dealing with statistics and setting policies, there will always be some chance of a run of bad luck.  For people who are uncomfortable with 5% failure rate, is 1% ok?  0.1%?  0.01%?  You can achieve any of these you want, just by lowering the initial 4%.  Some people aim to retire with a 2% withdrawal rate, which is VERY, VERY safe and conservative.  This also means they have to save twice as much as they would have if they were following a 4% withdrawal.  Probably at the end of their lives they’ll look back and think they should have retired far sooner than they did.

But What Do I Do if it Does Fail???

The study was interesting because it showed a way to quantify how much you need to save for retirement to be convinced that you “had enough”.  This is an ongoing worry for most people.  Each of my grandmothers asked at one point during their (prolonged) retirements “will I run out of money?”.  The 4% rules let’s you consider this important question – instead of just hoping for the best.

If it does fail, you’d see you portfolio value dropping annually and would be hearing in the news about everyone freaking out about the poor stock market returns.  In that situation (the 1 in 20), instead of sitting back and watching all your money disappear, you would tighten up your spending as much as you could, consider taking a part time job – if you were still physically able – and monitor conditions until things improved, at which point you could quit the job and increase your spending.

Related: Work as Insurance During Early Retirement

Can I Just Put the Money in CDs?

The FIRECalc linked to above assumes your portfolio is split between equities (stocks) and fixed income (bonds).  I will have future posts on this subject, but that’s pretty much what you want to do with your investments regardless of whether you’re interested in the 4% rule or not.

Is There Any Way I Can Improve This Result?


I’ve already mentioned two possibilities:  lowering your withdrawal rate to increase your odds of success and increasing your income and decrease your spending if you run into a run of bad years for returns.  Once you reach sufficient savings that you could live off of 4% of them, there’s no rule that you can’t keep earning and saving for a couple more years to give yourself more of a cushion – this is equivalent to lowering your withdrawal rate.  If you aren’t quite ready to fully retire, having a part-time job – or some income earning activity – can also help you increase your confidence in the process.

I’m currently living this approach to spending – living off of 4% of my networth – and I’ve added two extra safety elements.  First, I only spend 4% of my portfolio, I don’t increase it for inflation.  This means if I run into years of bad returns, things will be increasingly tight for me until I am forced to drop my spending or increase my income.  I’ve also used my starting networth as a “canary in the coal mine” to warn me about problems.  If I ever go below my networth at retirement modified by inflation it will be an indicator that I should keep an eye on things.  If I ever go below the nominal networth (not adjusted for inflation), I’ve pledged to myself and my wife that I’ll stop living off the portfolio, get a job, and earn income until I’m back above the inflation adjust amount.

Mr. Money Mustache has a nice write up on the 4% rule, as does Go Curry Cracker.

Related: Breaks During Your Working Life

This post has previously appeared on Money Time where John Ryan blogs about money related topics, ranging from investment to real estate to frugal living to financial independence.

3 thoughts on “A Practical View on the 4% Rule: Guest Post from John Ryan

  1. It’s really important to consider all the permutations – like it’s said in your article, 4% works great on a spreadsheet, but markets never work consistently (the average may be 10% but it’s 20% one year, 5% next year, -5% the year after etc).

    The only way we see to fully combat this, is to have enough of an investment balance to live purely off the income of it, so we’re never withdrawing from the capital. That way, hopefully, our income and capital will just steadily increase.


    1. Tristan: While I’d agree that markets don’t follow a predictable, consistent return, I’m not sure I agree that the only reaction to that is to live purely off of the income from it.

      There’s nothing magical about the division between capital gains vs. income – both are your investment returns. The idea that these are separate pots of money that must be treated differently is an example of “mental accounting” ( and is widely considered a logical fallacy.

      Thanks for your comment on the post!

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