What is the 4% rule?
The 4% rule is a retirement guideline: withdraw 4% of your portfolio in your first year, then adjust that dollar amount for inflation each year afterward. Historically, a portfolio built that way lasted about 30 years. It is the basis for the Rule of 25, which says you need roughly 25 times your annual spending saved. It is a helpful baseline, not a guarantee.
How the rule works in practice
Say you retire with $1,000,000. In year one you withdraw 4%, or $40,000. In year two you do not take 4% again; you take last year's $40,000 plus inflation. You keep raising the dollar amount with inflation each year regardless of what the market does. The idea is a steady, predictable paycheck from a portfolio of stocks and bonds.
Where the 4% number comes from
The rule grew out of research testing how much a retiree could withdraw without running out over a 30-year retirement, using historical U.S. market returns. Four percent was the rate that survived even the worst starting years in the data. The key phrase is 30 years: the rule was calibrated to that horizon, not to a 45- or 55-year retirement.
The limitations
The 4% rule assumes a fixed spending pattern, a specific stock and bond mix, and a roughly 30-year window. It also assumes you keep spending on schedule through market crashes. Its biggest blind spot is sequence risk: a bad market in your first few years can permanently damage a portfolio, even if long-run average returns are fine.
What to use instead of a single rate
Rather than committing to one fixed rate, many planners test a range of withdrawal rates against thousands of possible market paths and look at the probability the money lasts. That approach can reveal that 3.5% is safer for someone retiring young, while 4.5% may be workable for someone with substantial guaranteed income like Social Security. Your safe rate is personal.
Turn the rule into your odds
The 4% rule gives you a starting point; a simulation gives you a probability. By running your own savings, spending, and timeline through many market scenarios, you can see how often your plan succeeds and adjust your withdrawal rate until the odds look comfortable.