The 4% Rule and Its Limits
The 4 percent rule, derived from William Bengen's 1994 research, states that a retiree can withdraw 4 percent of the initial portfolio value in the first year, then increase that dollar amount by inflation each year, and the portfolio will survive for at least 30 years in 96 percent of historical scenarios. For a $1,000,000 portfolio: withdraw $40,000 in year one, $40,800 in year two (assuming 2 percent inflation), regardless of market performance. The rule assumes a 50/50 to 75/25 stock/bond allocation. Limitations: it was derived from US historical data during a period of strong markets; current lower expected returns may require a 3.3-3.5 percent initial rate; and it does not account for spending flexibility that most retirees naturally exhibit.