The 4% rule and its limits

The 4% rule is the most quoted number in retirement planning. Take 4% of your savings in the first year of retirement. Raise that dollar amount with inflation every year after. Don't change it when markets rise or fall.

It's a useful rule of thumb. It's also easy to misread. This guide explains where it came from, what it quietly assumes, and when your own safe number may be higher or lower.

Where the rule comes from

In the 1990s, researchers tested fixed withdrawals against past US stock and bond returns. They asked one question: what starting withdrawal would have lasted 30 years, whatever year you retired?

A portfolio of roughly half stocks and half bonds survived every 30-year period they tested at a 4% starting withdrawal. Higher rates failed in some of the worst starting years. Lower rates almost always left a large balance behind.

So the 4% rule isn't an average outcome. It's close to the worst historical case for one specific setup.

How it works, with numbers

Rosa retires with $1,000,000 in savings. Under the rule:

The inflation figures are invented for the example. Notice that the withdrawal never looks at the balance. If Rosa's savings drop to $700,000 in year 2, she still takes $41,200. That's 5.9% of what's left.

That rigidity is the rule's main weakness. Real people cut back after bad years and spend more after good ones.

What the rule assumes

Every rule of thumb carries assumptions. Here are the ones that matter most.

A 30-year retirement

The original tests used 30 years. That fits someone retiring at 65 who plans to age 95. If you retire at 50, your money may need to last 45 years or more. Longer horizons call for a lower starting rate. See how much you need to retire early.

No fees, and no taxes

The tests used market returns with nothing taken out for fund fees or advice. A 1% yearly fee takes a real bite out of a 4% withdrawal.

The 4% is also before tax. If Rosa's $40,000 comes from a traditional IRA, it's taxable income. Married and filing jointly, she and her husband would subtract the 2026 standard deduction of $32,200. The remaining $7,800 is taxed at 10%, so they owe $780 in federal tax. That's before age-related deductions or Social Security. Money from a Roth or from cash costs nothing in tax. Where the money comes from changes what you can actually spend.

US history repeats

The rule rests on one country's past returns, which were strong by world standards. Future returns could be lower, especially for bonds when interest rates are low.

A fixed mix of investments

The tests held a set stock and bond mix and rebalanced every year. A portfolio that's mostly cash, or mostly one company's stock, behaves differently.

Running out is the only failure

The rule counts success as "didn't hit zero." It ignores how close you came, and how much you left unspent. In many historical periods, a 4% retiree ended with more money than they started with.

Why 4% can be too cautious

Many retirees can safely spend more than 4% at the start:

• You're flexible. If you'd cut spending by 10% after a bad year, you can start higher. Rules that adjust to markets are called guardrails. See spending guardrails, explained.
• You have other income. A pension or Social Security covers your essentials, so the portfolio only pays for extras. That makes a lower success rate easier to live with.
• Your horizon is shorter. Retiring at 70 means fewer years to fund.
• Spending falls with age. Many households spend less on travel and leisure in their 80s, though health costs rise.

Why 4% can be too bold

Other situations call for less:

• A long retirement. Forty or fifty years, as with early retirees.
• High fees. Every percentage point of fees comes straight out of your safe rate.
• Little flexibility. If most of your spending is fixed, such as a mortgage, you can't cut back after a crash.
• A bad start. A large market fall in the first few years does lasting damage. That's sequence-of-returns risk.
• Big one-time costs. A new roof, a car or care needs aren't in a flat withdrawal.

Using the rule well

Treat 4% as a sanity check, not a plan. Some practical ways to use it:

1. Turn it around to set a savings target. Dividing yearly spending by 4% is the same as multiplying by 25. Spending $60,000 a year from savings suggests about $1,500,000. Our retirement savings calculator page walks through this.
2. Count only what savings must pay. Subtract Social Security and pensions from your spending first.
3. Think after tax. Plan for the tax on traditional withdrawals.
4. Decide your adjustments now. Write down what you'd cut, and when, before a crash happens.
5. Recheck every year. Base next year's spending on this year's balance, not on a number set a decade ago.

How the app handles the 4% rule

The app doesn't use a fixed percentage. It projects your own income, taxes and spending month by month, then tests the plan across many simulated markets.

The Spending strategies screen includes a constant, inflation-adjusted withdrawal, which is the 4% rule's method. It compares that with nine flexible strategies, including guardrails and a floor with upside. Every strategy runs on the same simulated markets, so the differences come from the rule, not from luck.

The Dashboard shows a monthly safe-to-spend range based on your actual balances. Outlook shows your chance of success and lets you choose how returns are simulated. You can run up to 1,000 simulated markets on the free plan, and up to 10,000 on Plus.

Frequently asked questions

Is 4% the same as a 4% return?

No. The rule is about how much you withdraw, not what you earn. The portfolio in the tests earned more than 4% on average. The extra covered inflation increases and bad years.

Should I use 3% instead to be safe?

Maybe, if you retire young, pay high fees or can't cut spending. A lower rate means working longer or spending less, so it has a cost too. Test both on your own plan before deciding.

Does the rule include Social Security?

No. The rule applies to your investment portfolio only. Add Social Security and any pension on top of the withdrawal.