Financial Term Explorer
4% Rule
A retirement withdrawal strategy stating you can withdraw 4% of your portfolio annually for 30 years without depleting your assets. Core principle of the FIRE movement.
π Definition
**The 4% Rule** is a retirement withdrawal strategy developed by financial advisor William Bengen in 1994. Based on historical stock/bond return data, withdrawing 4% of your portfolio in the first year of retirement (adjusted annually for inflation) has a **95%+ probability of lasting 30 years**. This forms the basis of the FIRE movement's target: annual expenses Γ 25 = target retirement assets.
In Simple Terms
Simply put, if you retire with $1 million, you can spend $40,000 (4%) in year one, then adjust for inflation each following year, and your money should last 30 years. For dividend investors, if your dividends cover that 4%, you never touch your principal!
Example
If you need $40,000/year for living expenses, 4% Rule says you need $1 million (40,000 Γ· 0.04). Build a portfolio with 4% dividend yield, and you receive $40,000 in dividends annually while preserving your principal.
π‘ Practical Tips
- 1Build a portfolio of quality dividend ETFs or Dividend Aristocrats yielding 4%+.
- 2Choose stocks with dividend growth rates exceeding inflation.
- 3During market downturns, reduce withdrawal rate to 3% to preserve capital.
β οΈ Common Mistakes
The 4% Rule is based on US market data and may not directly apply to other markets. For retirements longer than 30 years, consider using a 3.5% rule for extra safety.
β Frequently Asked Questions
When might the 4% Rule fail?βΌ
If you experience a major market crash immediately after retirement (sequence of returns risk), your portfolio may deplete earlier. Reducing withdrawals in the first few years is a protective strategy.