The 4% Rule

What is the 4% Rule?

The 4% Rule is a simple benchmark used to determine how much money you need to retire. It was popularized by the Trinity Study, which looked at decades of stock market data to find a “safe” withdrawal rate.

The rule suggests that if you withdraw 4% of your initial portfolio value in the first year of retirement, and adjust that amount for inflation every year after, your money has a very high probability of lasting at least 30 years.

The Rule of 25

The easiest way to calculate your number is to use the Rule of 25. If you want to withdraw 4% of your money each year, you need a total “nest egg” that is 25 times your annual spending.

For example, if you spend $50,000 per year, you need $1,250,000.

Why Use 4% for Early Retirement?

Most traditional retirement plans account for Social Security or pensions. However, the 4% Rule is the gold standard for those looking to retire early. Because you might be retired for 40 or 50 years instead of 30, using a conservative 4% withdrawal rate provides a massive safety net. It allows your investments to grow enough during the good years to survive the bad years.

The Social Security Factor

It is important to remember that the 4% Rule usually assumes your portfolio is your only source of income. If you plan to claim Social Security later in life, your “required nest egg” might actually be lower than what the calculator shows.

Once Social Security kicks in, it acts as a floor for your expenses. You only need your personal investments to cover the gap between your Social Security check and your total monthly spending. This means you might be able to stop working even sooner than the math suggests.