The 4% rule gives a quick figure: about 25 times your annual spending. We explain where it comes from and how long the money would last.
Key findings
- Under the 4% rule, you need about 25 times your annual spending.
- To cover 24,000 a year: 600,000 at 4% or 800,000 at 3%.
- With 600,000 earning 4% and withdrawals rising 2% a year, taking 2,000 a month would last 34 years and 7 months.
The 4% rule in one sentence
It is a widely quoted guideline from a 1994 study by US financial adviser William Bengen: using historical US stock and bond data, withdrawing about 4% of your savings in the first year and then raising that amount with inflation would have made the money last at least 30 years in almost every period studied.
That gives a quick rule of thumb: the capital you need is your annual spending divided by 0.04, or about 25 times what you spend in a year.
The numbers
If you want your savings to cover 24,000 a year (2,000 a month), at a 4% rate you would need 600,000. If you prefer to be more cautious and use 3%, 800,000. If you will have a pension or other income, subtract it first: your savings only need to cover the gap.
How long would the money last?
The rule is a division; to see the path you need a simulation. With 600,000 earning 4% a year and withdrawals rising 2% each year:
- withdrawing 2,000 a month (4%), the money lasts 34 years and 7 months;
- withdrawing 1,500 a month (3%), it lasts 54 years and 5 months;
- to make it last exactly 30 years, you could start by withdrawing 2,217 a month.
These figures assume a constant return. In reality some years the investment falls, and a bad run just as you start withdrawing weighs far more than one at the end. That is why many people use somewhat lower rates or adjust their withdrawals to how markets are doing.
What to consider
- How many years it must last. If you retire early, 30 years may not be enough.
- How it is invested. The original study used a mix of US shares and bonds; another portfolio may behave differently.
- Taxes and fees. They reduce what you can withdraw.
Work out your target with the retirement savings target calculator and check how long it would last with how long will my savings last.