The Cornerstone of FIRE
The 4% Rule Explained
The 4% rule is the most important concept in FIRE planning. It tells you exactly how much you can withdraw from your portfolio each year without running out of money — and it's backed by decades of research.
What is the 4% Rule?
The 4% rule states: withdraw 4% of your portfolio value in year one of retirement, then adjust that amount for inflation each year. Following this rule, historical data shows your portfolio has survived every 30-year retirement period in the last century.
The Rule in Practice
The FIRE Number Formula
FIRE Number = Annual Expenses × 25
or: Annual Expenses ÷ 0.04
Multiplying by 25 = dividing by 4% = the same thing
The Research Behind the Rule
William Bengen (1994)
Financial advisor William Bengen analyzed historical data from 1926-1992 and discovered that a 4% withdrawal rate from a portfolio of 50% stocks / 50% bonds never failed over any 30-year period in history. This became known as SAFEMAX — the maximum safe withdrawal rate.
The Trinity Study (1998)
Cooley, Hubbard, and Walz published the landmark Trinity Study which tested multiple withdrawal rates (3%, 4%, 5%, 6%) against historical data. It showed that a 4% withdrawal rate from a stock-heavy portfolio succeeded in 95%+ of all 30-year periods tested.
Big ERN's SWR Series (2016-present)
Karsten Jeske (Big ERN) published the most comprehensive modern analysis of safe withdrawal rates in 50+ parts. His research accounts for today's high valuations, sequence-of-returns risk, and extended retirement horizons common in FIRE — suggesting 3.25-3.5% for 40-50 year retirements.
Limitations & Criticisms
Originally designed for 30-year retirements
Early retirees at 40 may need 50+ years of portfolio longevity. The 4% rule becomes riskier over longer horizons. Consider 3-3.5% for very long retirements.
Sequence of returns risk
A severe bear market in the first 5 years of retirement can permanently cripple a 4% withdrawal strategy. This is sequence-of-returns risk — the biggest threat to early retirees.
Today's lower expected returns
Low interest rates and high stock valuations (high CAPE ratios) have led some researchers to lower their expected return assumptions, suggesting more conservative withdrawal rates.
US-centric historical data
The original research used US market data, which has historically outperformed global markets. International early retirees may need more conservative withdrawal rates.
Frequently Asked Questions
What is the 4% rule?
The 4% rule states that you can withdraw 4% of your portfolio in year one of retirement, then adjust that amount for inflation each year, and have a very high probability of not running out of money over a 30-year retirement period.
Where did the 4% rule come from?
Financial advisor William Bengen introduced the 4% rule in his 1994 paper "Determining Withdrawal Rates Using Historical Data." He analyzed historical stock and bond returns from 1926-1976 and found that 4% was the safe withdrawal rate that survived every 30-year period in history.
Is the 4% rule still valid today?
The 4% rule remains a useful starting point but has faced some scrutiny due to today's lower expected future returns and higher valuations. Some researchers now suggest 3-3.5% for early retirees with 40-50 year horizons. Big ERN's Safe Withdrawal Rate Series provides the most comprehensive modern analysis.
Does the 4% rule work for early retirement (40+ year horizon)?
The original Trinity Study was based on a 30-year retirement. For early retirees with 40-50+ year horizons, the 4% rule has more risk. Many FIRE practitioners use 3-3.5% withdrawal rates or plan for some flexibility (like part-time work in down markets).
What is sequence of returns risk?
Sequence of returns risk is the danger of experiencing poor market returns in the early years of retirement. If your portfolio drops 40% in year 1-3 while you're withdrawing 4%, you may permanently impair your ability to recover — even if markets later boom.
What is the Trinity Study?
The Trinity Study (1998) by Cooley, Hubbard and Walz was a landmark academic paper that tested various withdrawal rates against historical data. It found that a 4% withdrawal rate from a 50/50 stock-bond portfolio had a 95%+ success rate over 30 years.
How to Apply the 4% Rule Safely
Use a flexible withdrawal strategy
Plan to reduce spending by 10-15% during market downturns. This "flexible withdrawals" approach dramatically increases portfolio survival rates.
Keep 1-2 years of expenses in cash
A cash buffer means you won't be forced to sell stocks at depressed prices during a bear market — protecting against sequence of returns risk.
Consider a slightly lower rate (3.5%)
If retiring before 45 or in a period of high valuations, using 3.5% as your withdrawal rate adds significant safety margin.
Have a "return to work" plan
Knowing you can earn $20-30K from part-time work if needed is a powerful safety valve. Even 2-3 years of earnings at the start of a bear market can save a retirement.
Optimize tax withdrawal order
Withdraw from taxable accounts first, then tax-deferred, then Roth. This sequencing minimizes lifetime taxes and extends portfolio longevity.
See the 4% Rule Applied to Your Situation
Our calculator uses the 4% rule with inflation adjustments to give you a personalized FIRE number and timeline.
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