Do you want to retire early? The 4% rule is a common guideline that can help you achieve this goal.

The 4% rule states that you should withdraw no more than 4% of your retirement savings (nest egg) each year to ensure that it lasts throughout your retirement.

This article will explain the 4% rule in more detail and discuss some pros and cons of using this guideline.

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What Is The 4% Rule?

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The 4% rule is a guideline that suggests that you withdraw no more than four percent of your portfolio value each year during retirement. The money you take out can go towards living expenses or other things, such as travel or gifts. The rule is meant to help ensure your retirement funds last without having to go back to work.

Some experts suggest using a slightly lower withdrawal rate, such as three percent or even two and a half percent, especially if you’re retired for 20 years or more.

Regardless of your withdrawal rate, it’s important to remember that the 4% rule is just a guideline.

It’s not set in stone, and there will be years when you may need to adjust your withdrawals up or down based on market conditions and circumstances.

This leads to the importance of having a 2-year emergency fund that can cover all expenses if there is a large drop in the market.

What is the Purpose of the 4% Rule?

Simply put, the purpose of the 4% rule is to help ensure that your money lasts throughout retirement.

This is especially important if you plan to retire for 20 years or longer.

Related Content: How We Save 56% of Our Income [Family of 3]

Where Does The 4% Rule Come From?

The 4% rule is based on the work of William Bengen, a financial planner who wrote a paper in 1994 about safe withdrawal rates from retirement portfolios.

Bengen looked at historical data to see how different portfolio types and withdrawal rates would have fared over time.

He concluded that a portfolio consisting of 50% stocks and 50% bonds would have had a 95% chance of lasting 30 years if the investor withdrew no more than four percent per year.

How Does The 4% Rule Work?

The rule is simple:

You can only withdraw 4% of your retirement account per year.

If your retirement account is $100,000, you can withdraw $4000 per year.

Now you might be thinking, that’s not a lot of money. And you’re right, it’s not.

But the goal of the 4% rule is to make sure your money lasts throughout retirement, even if you live for 30 years or more.

The rule is based on the idea that your portfolio will grow over time and that the money you don’t withdraw will continue to grow and provide for you in retirement.

There are a few things to remember with the four percent rule.

First, it’s based on historical data and may not hold in the future.

Second, it’s a guideline, not a guarantee – you may need to save more or less depending on your individual circumstances.

For example, if you’d like a more comfortable retirement, you can set a goal of $1,000,000 in your retirement account. With the 4% rule, you could withdraw $40,000 per year!

Finally, it assumes that you will withdraw 4% of your savings each year in retirement, which may not be the case.

Despite these caveats, the 4% rule is a helpful way to estimate how much you need to save for retirement.

By following this rule, you can ensure that you are on track to reach your retirement savings goal.

Using The 4% Rule With An Investment Portfolio

To successfully use the 4% rule, it would need to be in an investment portfolio.

This is because the rule is based on the idea that your portfolio will grow over time, and you can withdraw four percent of the value each year without depleting your savings.

For example, if you’re 30 years away from retirement, the fund may be 90% stocks and just 10% bonds. But if you’re only five years away from retirement, it might be 50% stocks and 50% bonds.

This gradual shift helps to protect your savings while still allowing you to grow your money over time.

The most effective fund for the 4% rule is the S&P 500 Index Fund. On average, the S&P 500 grows at 11.5% per year.

Here is an example of calculating how much you’d need to retire comfortably using the 4% rule with the S&P 500.

The first step would be to decide how much income you’d need to live a financially free life.

The average cost of living for a U.S. citizen is approximately $1100 per month but let’s go with $2000 to be conservative and plan for a great retirement!

To receive a retirement income of $2000 per month ($24,000 per year), you’d need $600,000 invested into your S&P 500 account.

Now let’s see how long it would take to reach our goal of $600,000 using the historical growth rate of the S&P 500 at 11.5% annually.

$600,000 might seem like a lot, but with the power of compound interest and consistent monthly contributions, you can get there with just $121,000 as a total investment.

If you start with $1000 and invest $400 per month into an S&P 500 index fund, it would take 25 years to reach the goal of $600,000. But if you started investing at 25 years old, you could retire with an income of $24,000 at 55 years old!

If 25 years is too long, you can get there in only 15 years with monthly contributions of $1400. As you can see, there are many different variables that you can adjust to make the four percent rule work for you.

The Bottom Line: By calculating your desired income, you can find a retirement number that is comfortable for you.

The important thing to remember with the four percent rule is to start saving early and invest often!

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What Are The Pros And Cons Of The Four Percent Rule?

There are pros and cons to using the four percent rule as a retirement guideline.

Some of the pros include:

  • It’s simple to understand and follow.
  • You can adjust your withdrawals up or down as needed based on market conditions and your circumstances.
  • It’s a helpful way to estimate how much you need to save for retirement.
  • It uses the stock market’s ability to grow to your advantage.

Some of the cons include:

  • It’s based on historical data and may not hold true in the future.
  • It’s a guideline, not a guarantee – you may need to save more or less depending on your circumstances.
  • It assumes that you will withdraw four percent of your savings each year in retirement, which may not be the case.
  • The large number needed can seem overwhelming.

Common Mistakes With The 4% Rule

Regarding retirement planning, the “four percent rule” is a guideline that’s often cited.

The rule of thumb goes like this: If you withdraw four percent of your nest egg each year during retirement, you’re unlikely to run out of money.

But as with any rule of thumb, there are exceptions – and the four percent rule is no exception.

People make several common mistakes when using the four percent rule. Here are eight of the most common:

Mistake #1 – Not Adjusting for Inflation: One mistake people often make with the four percent rule is not adjusting for inflation.

When you retire, your expenses will likely go up – not down. That’s why it’s important to factor in inflation when withdrawing money from your nest egg.

Mistake #2 – Not Taking Into Account Your Longevity: Another mistake people make is not considering their longevity.

Just because the average life expectancy is around 78 years doesn’t mean that’s how long you will live.

If you want to be safe, plan for a longer retirement.

Mistake #3 – Not Planning for Unexpected Expenses: People do not plan for unexpected expenses.

Retirement is often unpredictable, and you may need more money than you think.

Make sure to have a cushion in your nest egg so you can cover any unexpected costs that come up.

Mistake #4 – Failing to take into account your own individual circumstances: The four percent rule is a guideline, not a definite rule.

Your retirement plan should be unique to you and consider your circumstances.

Mistake #5 – Assuming that you will have the same expenses in retirement as you do now: Retirement is often a time when people have time to spend money on things like travel and hobbies that they didn’t have time for while working.

As a result, your expenses in retirement may be different than they are now.

Mistake #6 – Not factoring in Social Security: If you’re eligible for Social Security, be sure to factor this into your retirement plan.

Social Security can provide you with a source of income in retirement, which can help reduce the amount you need to withdraw from your nest egg.

Mistake #7 – Withdrawing in tax-inefficient ways: People do not consider the taxes they’ll owe on their withdrawals.

If you’re not careful, you could owe more in taxes than you need to.

That’s why investing with a tax-efficient account is important from the start.

Mistake #8 – Not having a plan B: Another mistake people make is not having a backup plan. What if the market crashes and your nest egg takes a hit?

What if you live longer than expected and run out of money?

Having a plan B can help you weather any storms that come your way in retirement.

As mentioned previously, we highly recommend having a fully funded emergency fund that can cover all expenses in case of a market crash.

The Bottom Line:

If you avoid these mistakes, you’ll be well on your way to a successful retirement.

Just remember to factor in inflation, plan for long life, and have a cushion for unexpected expenses.

You can make the four percent rule work with those three things in mind.

The Rule of 25 vs. the 4% Rule: What’s the Difference?

The Rule of 25 vs. the 4% Rule

The 4% rule indicates that you can withdraw 4% from your retirement and expect that the returns from your investment will surpass the withdrawal rate.

The problem is that with inflation added to this equation, the purchasing power of your money will decrease over time. If you withdraw 4% and the inflation rate was at 8% last year, you’re withdrawing 12% in purchasing power.

If the growth of your investment were less than 12% last year, then you would have to begin dipping into your principal, which is not ideal. This is where the multiply-by-25 rule comes in.

The rule of 25, on the other hand, is a general guideline that suggests you multiply your total salary by 25 to determine how much money you need to save for retirement.

This rule of thumb assumes that you will want to replace your current income via investments during retirement.

It also factors in an estimated annual return of around 10.5% but is used to calculate the total principal you’d need for retirement. It helps to build a mental framework for those pursuing financial freedom.

The 4% rule calculates how much you can withdraw from your principal after the 25x rule is implemented.

For example, first, you would use the 25 rule to calculate how much you need to have saved. Then, the four percent rule would tell you how much you can withdraw from that savings account each year. The 25x rule is a good starting point, but the 4% helps ensure you don’t outlive your money.

Common Questions About The 4% Rule

Q: How long will it take to retire if I follow the rule?

A: This depends on how much money you have saved and how much you can save each year.

Use the example mentioned above and adjust the variables to your preference.

Q: What happens if my retirement lasts more than 30 years?

A: If you want to retire sooner than 30 years, you will need to invest more each month. This is because compound interest will build more reserves for retirement.

You can also consider withdrawing only 2% rather than 4% to allow your investments to keep growing beyond 30 years.

Q: What if I can’t save enough money to retire?

A: If you cannot save enough money to retire using the four percent rule, there are a few options you can consider.

One option is working part-time in retirement. This can help supplement your income and give you something to do in retirement.

Another option is to downsize your lifestyle. Doing so will reduce your expenses and free up extra cash to help fund your retirement.

Lastly, you can delay retirement. This may not be ideal, but it can give you more time to save money and prepare for retirement.

Q: Is the four percent rule a guaranteed way to retire?

A: No, the four percent rule is not a guaranteed way to retire. It is simply a guideline that many people with success have used.

There are no guarantees in life, so it is important to remember that anything can happen when following this rule.

In Summary

The four percent rule is a simple estimate of your retirement savings needs.

Remember to take into account your circumstances when using this guideline.

With careful planning and consistent investing, you can ensure a comfortable retirement for yourself down the road.

Thanks for reading!


We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!