The 4% Rule

How much do I need to retire?

I’m guessing you have either heard that question from friends or wondered it yourself. It is the “million-dollar-question” after all. I often hear “you CAN’T retire on less than $5,000,000 these days”. Worse yet, some just give up by saying “I will never be able to retire”.

What if it wasn’t that complicated? What if history showed us there was something called a Safe Withdrawal Rate? And what if that Safe Withdrawal Rate just happened to be right around 4% of the value of your portfolio?

I believe they would call that The 4% Rule.

With anything when it comes to your personal finances, you want to be careful when making assumptions. We certainly can’t predict the future, so we need to remain conservative in what we can plan for - a worst case scenario, if you will.

This is exactly what the 4% Rule (or Safe Withdrawal Rate) is - a worst-case scenario for how much you can plan to withdraw from your retirement savings on an annual basis without having to draw down the principal (value at retirement).

Market Crashes

You hear it all the time - what if the market crashes and wipes away all of your savings? Yes, there is always going to be a chance of the next market crash, but how much of an effect do market fluctuations have on your retirement portfolio?

We need to remember two things - market crashes do happen, but the markets continue to rise over long periods of time. To help get you through down markets, it is crucial for you to have a sizeable emergency fund. I recommend my retired clients have up to 1 year of expenses in their savings account, much higher than the typical emergency fund of 3-6 months for working clients. This larger emergency fund will help cover expenses if the market is down and it doesn’t make sense to sell any assets to help fund your retirement.

Michael Kitces wrote an extensive blog post showing how the 4% rule has held up when individuals retire at the worst possible time - during a market crash. He analyzed retirement start dates in 1929, 1937, 1966, 2000, and the one fresh on our minds - 2008. Have these portfolios survived their turbulent beginnings?

The answer is yes, across the board (2008 is still in progress, but it looks promising). We all remember how dire 2008 was for individuals retirement portfolios, but look at how the portfolio is now worth MORE than when the individual started with a $1,000,000 portfolio in 2008, including withdrawals of 4% plus an inflation adjustment each year.

Early Retirement

There is an ever growing community of individuals who are working towards early retirement, called FIRE (Financially Independent Retire Early). How does the 4% Safe Withdrawal Rate hold up for those individuals looking for a retirement longer than 30 years?

The 4% Rule holds up just as well for those with longer retirements, as it is the rate at which you can withdraw your money, such that you don’t run out during your lifetime.

Early retirees have a few huge advantages over the traditional 65 year-old retiree.

One advantage is their willingness to save and focus on minimizing their expenses. Most in the FIRE community target saving 50-60% of their annual income so that they can retire in their 30s or 40s. By understanding their finances in depth, they will be able to make adjustments to their retirement plan, if needed.

The second advantage is their age. Most early retirees have found ways to earn income outside of their day jobs (a side hustle). By earning passive income or “fun” money on their own time, they can continue these habits into their early retirement, which can help cover some of their annual expenses - reducing their investment withdrawals even lower than 4%.

The third advantage is simply their age. If something completely throws off their retirement plan, they are more than capable of returning to the work force to rebuild their savings as needed.


So you see that the 4% Rule holds up during market crashes and during long retirements, so how do you go about calculating how much you really need to fund your retirement?

When thinking about retirement, most immediately default to replacing their income. What you need to focus on is your expenses. Knowing exactly how much you are spending is vitally important during your retirement years, as this will determine how much you need to take out of your retirement accounts (which have tax planning considerations to factor in).

Calculate all of your monthly expenses (including the big, unexpected expenses you inevitably will have each and every year). Take your monthly expense number and multiply by 300. You have your number!

Monthly expenses = $5,000

X 300

= $1,500,000

If you want to double-check your answer, you can take $1,500,000 x 4% and find it equals $5,000. This means that a retirement portfolio of $1,500,000 will cover $5,000 of monthly expenses plus an annual adjustment for inflation, indefinitely.


Now you can see why your retirement number is not just an arbitrary number (at least $5M!!), but is actually an easy to calculate figure based on YOUR personal expenses.

The 4% Rule tells me one thing very clearly. It pays to reduce your monthly expenditures. By reducing your monthly expenses, you not only are able to save more for your eventual retirement, but you can also reach your retirement number quicker! This is how the FIRE community is able to retire at least 20+ years before the typical retirement age.

If you only spend $3,000 per month, you need a retirement investment portfolio of $900,000, while your neighbor that spends $7,000 per month needs a retirement portfolio of $2,100,000!


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