What is the 4% rule for retirement?

When you think about retirement, one big question tends to surface: How much can I safely spend without running out of money? That’s where the 4% rule comes in. It’s one of the most well-known strategies for figuring out how much you can withdraw from your retirement savings each year, while still making your money last throughout the duration of your retirement.

The 4% rule is a simple process — withdraw 4% of your retirement savings in your first year of retirement, then adjust that amount each year for inflation.

This idea came from a 1990s study by financial planner William Bengen. He looked at historical data, and found that retirees who followed a strategy of investing in a mix of stocks and bonds had a strong chance of their money lasting 30 years.²

For example, if you retire with $1 million, you’d withdraw $40,000 in year one. In year two, you’d increase that amount slightly to keep up with inflation, and so on.

The 4% rule is straightforward, but applying it effectively requires a closer look at your individual financial picture.

1. Add up all your retirement savings.
2. Include 401(k)s, IRAs, brokerage accounts, and any other investable assets.
3. Multiply that total by 0.04.
4. This gives you your initial annual withdrawal amount.

If you adjust each year for inflation, this will ensure your finances keep pace with any rising costs.

As an example, if you had saved $750,000 for your retirement, you’d multiply this by 0.04 in year one to give you $30,000. In year two, you’d increase that amount to account for inflation, giving you a new yearly allowance.

While the rule provides a helpful baseline, it's not a one-size-fits-all approach. Key factors that can influence its success include:

• Your retirement timeline: Planning to retire early or expecting a longer retirement? You may need a more conservative approach.

• Market performance: A downturn early in retirement can significantly impact your portfolio’s longevity.

• Investment mix: A more aggressive or conservative portfolio will affect your risk and return.

• Healthcare and lifestyle costs: These can vary greatly and may not align with a fixed withdrawal rate.

There are times when sticking to the 4% rule could be risky, or appear overly cautious:

• Low interest rate environments: Bonds may offer less income, making it harder to sustain 4% withdrawals.

• High inflation periods: You may need to withdraw more to maintain your standard of living when inflation goes up.

• Changing spending needs: If your expenses fluctuate (think medical costs or family support), a fixed rate might not fit your living situation.

If the 4% rule feels too rigid, or your situation calls for more flexibility, there are other retirement strategies worth considering:

Instead of a fixed percentage, dynamic withdrawals adjust based on portfolio performance or market conditions. For example, you might withdraw less during slow market periods, or spend more when markets are strong. This method could help preserve your nest egg during tough times, while giving you a boost when it looks safer to spend.

Learn more about strategies for managing required minimum distributions (RMDs).

Annuities offer predictable income for life, which can bring peace of mind in retirement. They can be especially helpful when used alongside Social Security and other income streams. There are two typical kinds of annuity available:

1. Fixed annuities: These provide stable payments regardless of market conditions.

2. Variable or indexed annuities: These offer more growth potential, but come with some risk.

While not a complete retirement solution, high-yield savings accounts and certificates of deposit (CDs) can support short-term needs. An accessible HYSA may be used for emergency funds or planned expenses, while CD ladders allow you to take advantage of higher rates over a longer time period.

The 4% rule is still a useful starting point, but it shouldn’t be followed blindly. Today’s retirees face different economic conditions than those of the past, meaning it could be worth adapting this strategy or seeking further financial advice before going through with it.

In 2025, the landscape looks a lot different. The economy is experiencing higher interest rates than we’ve seen in the past decade and  inflation, while lower than 2022’s highs, remains a key planning variable. Rising life expectancy means retirees must also plan for potentially longer spending horizons.

These shifts mean the 4% rule may need adjusting, and some experts suggest a slightly more cautious rate of 3.7% may reflect future forecasts for inflation and interest rates.³

Some financial advisors may suggest customizing the rule rather than abandoning it:

• Consider a guardrails strategy. Set upper and lower limits on withdrawals based on the performance of your portfolio.

• Revisit your plan annually and adjust as needed.

• Use financial planning software or work with a financial advisor for personalized insights.

Whether you’re years from retirement or already enjoying your golden years, the key takeaway is this: your retirement strategy should reflect your goals, lifestyle, and financial reality.

The 4% rule can be a helpful benchmark, but it's not the whole picture. With the right combination of smart planning, income diversification, and market awareness, you can build a retirement plan that’s flexible, resilient, and uniquely yours.

Want to learn more about boosting your retirement income with high-yield options? Explore savings products on the Raisin marketplace.

Take your total retirement fund account and multiply it by 0.04. That will give you the total you can withdraw in year one of retirement. In year two, you don’t repeat the same calculation. Instead, you take the amount you withdrew in year one and increase it slightly to match inflation.

For example, if you retire with $500,000, multiplying by 0.04 gives you $20,000 to withdraw in the first year. If inflation is 3%, you’d increase that amount to $20,600 in year two, and so on.

If you retire early, you may want to consider a more conservative approach to your retirement planning, ensuring you have enough money to live off throughout the duration of your retirement years. Proponents of the FIRE movement (Financial Independence, Retire Early) suggest a 3.5% initial withdrawal rate may be more realistic.⁴

You should reflect market changes by altering the amount you spend each year. For example, some experts suggest using a dynamic withdrawal strategy to account for fluctuating market conditions.⁵

The 4% rule can be used as a guideline to help plan retirement, but you may wish to explore other strategies such as dynamic withdrawals, annuities, and high-yield CDs. You might consider reaching out to a financial advisor for tailored advice relevant to your situation.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

Sources

1. https://www.morningstar.com/content/cs-assets/v3/assets/blt9415ea4cc4157833/blt0af2d3cad1ba8b15/6759dde8f53d98c331376c09/State_of_Retirement_Income_2024.pdf
2. https://kyestates.com/wp-content/uploads/2015/02/Bengen1.pdf
3. https://marketing.morningstar.com/content/cs-assets/v3/assets/blt9415ea4cc4157833/bltf9f3129799570e1d/680a4bd99b1d8b8e97acff94/State_of_Retirement_Income_2024.pdf
4. https://www.kitces.com/blog/the-problem-with-fireing-at-4-and-the-need-for-flexible-spending-rules/
5. https://www.kiplinger.com/retirement/retirement-planning/dont-let-a-market-crash-crush-your-retirement