Withdrawals in retirement: the 4 % rule and its limits

Building wealth is about saving and time. In the withdrawal phase another question arises: how much can you take out each year without running out of money too early? A frequently quoted rule of thumb is the "4 % rule".

Where the 4 % rule comes from

• William Bengen (1994) used historical US data from 1926 to examine which initial withdrawal rate – then adjusted for inflation each year – would have lasted through every 30-year period studied. For portfolios of US stocks and US government bonds he arrived at about 4 % of the starting portfolio.
• The so-called Trinity study (Cooley, Hubbard and Walz, 1998) calculated, for various stock/bond mixes, withdrawal rates and periods, in how many historical US periods the money would have lasted.

In simple terms the rule says: in year one, withdraw 4 % of the starting portfolio; in later years, withdraw the same amount adjusted for inflation – regardless of how markets perform.

The assumptions behind it

1. US data: the US stock market performed above average internationally in the 20th century. Studies using data from other countries (e.g. Wade Pfau, 2010) found lower historically "safe" withdrawal rates for many markets.
2. 30 years: retiring earlier or living longer requires a longer horizon and usually a lower rate.
3. No costs or taxes: fund costs, custody fees and taxes on gains reduce the amount that can be withdrawn.
4. Rigid withdrawals: the rule does not adjust withdrawals in bad market phases.
5. Specific allocation: the results apply to the stock/bond mixes studied, not to every portfolio.

Sequence-of-returns risk

What matters is not just the average return but the order of returns. If prices fall sharply in the first years of withdrawals, a larger part of the portfolio has to be sold at low prices. That money is missing later, even if markets recover. Two retirees with the same average return can therefore end up very differently.

More flexible approaches

• Variable withdrawals: the withdrawal follows the portfolio, e.g. a fixed percentage of the current value.
• Guardrails: the withdrawal is cut if the portfolio falls below a threshold and raised if it has grown markedly.
• Cash reserve: money for the next few years is kept in low-risk assets so that nothing has to be sold in a crisis.

With the withdrawal plan calculator you can model different withdrawals, returns, costs and a crisis scenario – as a model, not a forecast.

Taxes on withdrawals

How withdrawals are taxed depends on your country of residence. In many countries only the gain portion of a fund sale is taxed, not the full amount. Allowances, partial exemptions and holding-period rules differ from country to country.