Free course · Module 10
The 4 Percent Rule
Understand the retirement withdrawal shortcut, see why early losses matter and estimate the spending gap your savings would need to cover.
Written by the StockEducation Editorial Team · Reviewed by Associate Professor Charles Lo, CPA, PhD · Updated 16 Oct 2026 · How we check lessons
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Read in order, or return to the idea you need.
Idea 1 of 4
Start with 4%, then adjust the dollars.
The classic rule starts with 4% of the portfolio’s initial value. After the first year, adjust that dollar withdrawal for inflation. You do not automatically recalculate 4% of each year’s new balance. Source 1.
With a hypothetical $1,000,000 starting portfolio, year one is $40,000. If inflation is 3% each year, year two is $41,200 and year three is $42,436. The amount withdrawn changes; its percentage of the remaining balance can move with markets.
This is a way to describe a spending policy, not a guaranteed paycheck. The policy and the assumptions behind its historical tests both matter.
The classic rule follows an inflation-adjusted withdrawal, rather than a fixed percentage of each new balance.
Where did the rule come from?
Is taking 4% of the new balance the same strategy?
4% sets the first withdrawal. Inflation adjusts later dollar amounts.
Idea 2 of 4
The order of returns matters.
Withdrawals make the order of gains and losses important. The two paths below use the same returns, +20% and −20%, in reverse order. Each begins with $100,000 and withdraws $4,000 at the beginning of each year.
With the gain first, $96,000 grows to $115,200; after the next withdrawal, $111,200 falls to $88,960. With the loss first, $96,000 falls to $76,800; after the next withdrawal, $72,800 grows to $87,360.
Without withdrawals, either return order would leave $96,000. The withdrawals change the arithmetic. This two-year illustration isolates sequence risk; it does not estimate a thirty-year success rate.
Year-one closing balance $115,200
Year-one closing balance $76,800
Both paths withdraw the same $4,000 at the beginning of each year. The loss-first path ends $1,600 lower.
Why is an average return not enough?
Is 4% automatically safe for a retirement today?
Test a difficult early sequence, not only a smooth average return.
Idea 3 of 4
Size the gap your savings must cover.
Apply the shortcut to the amount the portfolio must fund. In a simplified annual budget, subtract other income available in that same period from planned spending. Use a consistent basis for taxes and inflation.
Suppose planned spending is $60,000 and other income is $20,000. The remaining annual portfolio gap is $40,000. Dividing by 0.04 gives $1,000,000; multiplying by 25 gives the same result.
This is a first-pass estimate, not proof that the balance is sufficient. Changes in income timing, taxes, spending, investment returns or retirement length need a fuller plan.
At a 4% starting assumption, dividing by 0.04 is the same as multiplying the annual gap by 25.
Where do Social Security and pensions fit?
Estimate the portfolio’s spending gap, with income and dates aligned.
Idea 4 of 4
Test a starting rate, not a promise.
Change the gap or the starting-rate assumption. The exercise divides the annual portfolio gap by the chosen percentage. A lower starting rate produces a larger illustrative balance for the same gap.
The percentages are comparison assumptions. Choosing one does not establish that it is sustainable or appropriate for you. This calculation does not simulate investment returns or calculate a depletion year.
Turn an annual gap into a rough balance
Hypothetical · first-pass math$40,000 ÷ 0.04 = $1,000,000
Hypothetical US-dollar arithmetic: annual gap ÷ starting rate. Rounded to the nearest dollar. No return path, inflation projection, fees, taxes, income changes, retirement duration or probability of success is calculated. A larger balance or lower rate does not guarantee sustainability.
Try the Investment Withdrawal Calculator
Treat the shortcut as a question to test, not a retirement plan by itself.
Quick check
Three quick checks. Feedback straight away.
A $1,000,000 portfolio starts with a $40,000 withdrawal. With 3% inflation, what is year two under the classic rule?
Choose an answer to see the explanation.
The annual portfolio gap is $50,000. What does the 4% shortcut calculate?
Choose an answer to see the explanation.
Why can reversing the same two returns change the result when withdrawals are made?
Choose an answer to see the explanation.
Review your takeaway card and the learning path
- Start with the initial portfolio. The classic rule then adjusts the dollar withdrawal for inflation.
- Watch the return sequence. Withdrawals and early losses can interact.
- Calculate the gap. Align other income, spending, taxes and dates.
- Test the assumptions. Historical success and shortcut arithmetic are not guarantees.
Reading markers and these practice checks stay on this device. They do not mark the LMS lesson complete.
Sources and assumptions
- Charles Schwab: The 4% Rule. Classic inflation-adjusted-dollar policy and caveats about horizon, allocation, taxes, fees and flexibility. Current numeric withdrawal estimates are not reproduced here.
- William Bengen: Determining Withdrawal Rates Using Historical Data (1994; 2004 reprint). Historical US portfolio assumptions and the illustrative 50/50 test. The 33-year result is a finding in that sample, not a forecast.
- Cooley, Hubbard and Walz: Retirement Savings (1998). The original Trinity study’s allocations, 1926 to 1995 data, payout periods, success definition and cost exclusions.
- Social Security Administration: Retirement Age and Benefit Reduction. Official US information on birth year, claiming age and early-benefit reductions; use your own entitlement estimate and timing.
Sources checked 16 October 2026. All dollar examples are hypothetical nominal US dollars. The first diagram assumes 3% annual inflation; the sequence diagram assumes zero inflation, $4,000 beginning-of-year withdrawals and two specified returns; the budget and interactive exercise are first-pass division only. No illustration supplies personal advice, an after-tax budget, a current recommended withdrawal rate or a guaranteed portfolio life. Check local rules and obtain qualified advice for an individual retirement plan.
StockEducation provides general education, not personal financial, tax or legal advice. Nothing here recommends a specific security. Investing involves risk, including loss of money you invest.
