One of the fundamental questions in personal finance is, “How much money do I need to retire?” A standard answer is to use the 4% Rule, generally interpreted as withdrawing 4% of your invested assets per year in retirement. When inverted, the rule suggests you can retire when your net worth is 25X your annual expenditure. Surprisingly, as fundamental as this concept is to the FIRE movement, this is as deep as most people dig.
Even this superficial understanding has led to both critics and fanatical supporters. Half consider the 4% Rule arcane academia not fit for the modern world, and the other half hold it in holy veneration as the answer to all our retirement problems. Nearly everyone on both sides of this debate is wrong.
There are three problems with the commonly held beliefs about the 4% Rule.
1. A general lack of understanding of the Trinity Study leads to extrapolation in situations that were not intended.
2. There is a belief on one side that the research findings are outdated and no longer applicable.
3. There is a belief on the other side that it is a hard and fast rule that can be followed blindly.
It’s not surprising that there are so many misconceptions regarding the 4% Rule, given that the average American cannot critically read research studies. As medical professionals, we should know better than to blindly accept an “evidence-backed” plan without understanding the methodology and analyzing the results. Otherwise, we end up treating hyperkalemia in the ER with Kayexalate for 60 years based on a study of 10 inpatients while ignoring newer studies that suggest the possibility of a serious side effect (toxic megacolon). Yeah, that happens sometimes.
To remedy this, I want to take a deep dive into the origins of the 4% rule: the research backing it, its implications, and how to utilize it safely. I also want to discuss its drawbacks and limitations. Ultimately, a thorough understanding of the 4% rule will help you make practical decisions in your financial journey.
Origins of the Rule
Bill Bengen (1994)
The story of the 4% rule begins in October 1994, when a financial planner named Bill Bengen published “Determining Withdrawal Rates Using Historical Data” in the Journal of Financial Planning. Bengen used historical data to analyze the risk that a 50% stock / 50% bond portfolio would run out of money at various annualized withdrawal rates. Up to this point, retirement plans were based on average historical market returns. His concern was that unexpected but not uncommon financial events could upend this type of plan. He postulated that events like the Great Depression, the stock market decline of 1937-1941, and the market crash/high inflation period of 1973-1974 would leave retirees vulnerable to running out of money.
To solve this “worst case scenario” problem, Bengen used historical market data to study the returns of 50 consecutive retirement cohorts, beginning with those that retired in 1926. He studied the results of investment portfolios constructed with different stock/bond ratios at various withdrawal rates. The results suggested a 4% withdrawal rate as the optimal safe withdrawal strategy in retirement, lasting at least 30 years in every cohort studied. However, the portfolio’s construction mattered as well. Bengen concluded, “. . . it is appropriate to advise the client to accept a stock allocation as close to 75 percent as possible, and in no cases less than 50 percent.”
The Trinity Study (1998)
Heavily influenced by Bengen’s work, three researchers at Trinity University in San Antonio, Texas, published an article in the 1998 American Association of Individual Investors (AAII) Journal titled, Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable by Philip L. Cooley, Carl M. Hubbard, and Daniel T. Walz.
As with any research, the question they were trying to answer matters. Taken directly from the paper, the authors state: “Thus, the question addressed here is: What is a reasonable withdrawal rate from a portfolio for planning retirement income? Or stated differently, what withdrawal rate will likely be sustainable during a specified number of years?”
Additionally, the authors wanted to know, “What is the likely value of my portfolio after making all of those annual withdrawals during my retirement years?” In other words, how much money would be left at the end of the payout period? This is important because it allows you to determine when and if you can extrapolate the results to a longer retirement term. Let’s look a little closer at the study design.
Trinity Study Variables
- Annual withdrawal rates are a % of the initial portfolio (from 3% – 12%).
- Payout Period – 15, 20, 25, or 30 years.
- Asset Allocation – (100% stocks), (75% stocks/25% bonds), (50% stocks/50% bonds), (25% stocks/75% bonds), and (100% bonds). The S&P 500 was used for the stock portfolio, and high-quality corporate bonds were used for the bond portfolio.
- The study did not account for taxes – all withdrawals are therefore assumed to be in tax-deferred accounts.
- The study did not account for transaction costs – the portfolio is assumed to be held in low-cost index funds.
- Examined historical returns from a 70-year period (1926-1995) and a 50-year period (1946-1995).
- The authors examined returns with and without inflation. For the inflation-adjusted data, the AWR is adjusted yearly, either up with inflation or down with deflation, using the CPI (consumer price index).
- The authors examined the Terminal Portfolio Values. If the portfolio survived the payout period, how much was left?
Results
So, what is the safe withdrawal rate (SWR) discovered in the Trinity Study? The authors surmised, “It is clear from the results . . . that the answer depends on the mix of stocks and bonds in the portfolio, a planned payout period, and on a retiree’s degree of risk aversion and preference for consumption patterns.” The authors outlined some general conclusions.
- The longer the payout period, the lower the SWR
- Bonds in your portfolio increase the certainty of a portfolio’s success but cost you spending power. The authors conclude that most retirees would benefit from a portfolio of at least 50% stocks.
- If you want your SWR to be indexed to inflation and maintain purchasing power throughout the payout period, you must accept a lower SWR. Not all retirees may want to make this trade, especially if they have significant fixed costs.
- “For stock-dominated portfolios, withdrawal rates of 3% and 4% represent exceedingly conservative behavior.” The authors conclude that retirees in this cohort will likely end the payout period with large estates worth multiples of their IPV.
- Large terminal portfolio values are the norm, even with less aggressive portfolios (more bonds). If the retiree acts prudently to not exhaust the portfolio by adjusting their withdrawals based on actual returns, especially at the beginning of the payout period, they will also likely end the payout period with multiples of their IPV.
- You have a 50% chance of living beyond your actuarially determined life expectancy, so the authors suggest being conservative and using the longer payout periods.
The results were exceedingly similar to those in Bengen’s 1994 paper. Hold at least 50% stocks in your retirement portfolio; The higher the percentage of stocks, the higher your Terminal Portfolio Value will likely be due to the stock market’s higher returns. However, this is tempered by the stock market’s higher volatility, which creates a higher risk of running out of money should the “worst-case scenario” happen. To counteract this risk, a withdrawal rate of 4% is exceedingly safe. Sounds familiar, right?
Follow-up Studies
Critics of the Trinity Study have called it a 30-year-old study that is no longer relevant in today’s world. Having been published in 1998 with data ending in 1995, are the critics right? Would the study results hold up in the years that followed, which included the dot-com bubble/crash and the Great Recession? Fortunately, these questions have already been answered.
Bill Bengen Strikes Back
Bengen also wanted to know the answer to these questions and followed up his 1994 work with additional publications. In a 2012 edition of Financial Advisor magazine, Bengen published “How Much Is Enough?”, which re-examined his original conclusions with 16 additional years of data, which included the doldrums of the Great Financial Crisis.
In this work, Bengen begins by stating that he previously adjusted his 4% recommendation to 4.5% with his clients. He concludes that 4.5% continued to be a SWR through 2012. However, he was concerned with the repercussions of the GFC. He devoted a section of his writing to exploring strategies to lower retirees’ spending and increase income should future returns decrease or future inflation rise.
Others Join the Party
Many other researchers have put their spin on SWR research, updating and expanding on previous findings, most notably Michael Kitces and Wade Pfau, who studied the 4% Rule over more extended periods.
Return of the Bengen
More than 30 years have passed since Bengen’s original work, adding an additional thirty cohorts to the data set. Bengen returns in August of 2025 with a new book, A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More, in which he reportedly adjusts his SWR higher again, this time closer to 5%!
Appropriate Application of the 4% Rule
Armed with a thorough understanding of the research underpinning the 4% Rule and its evolutions, let’s revisit the three common misconceptions I mentioned earlier.
Problem #1 – There is a lack of understanding of the Trinity Study, leading to its results being extrapolated to situations they were not intended.
Inherent in the Trinity Study’s methodology is the payout period. The study was designed to discover how much you can withdraw AND for how long. Many in the FIRE community seem to forget the second half, assuming that in all cases, you can extrapolate a safe withdrawal rate into eternity.
The study’s results demonstrated that the payout period and the SWR were inversely proportional. The longer the payout period, the lower the SWR. The longest period studied was 30 years. Automatically assuming that a set SWR (like 4%) will extend to a 40, 50, or 60-year retirement fundamentally misunderstands the study’s findings. The authors explicitly state, “Early retirees who anticipate long payout periods should plan on lower withdrawal rates.” It’s hard to get much clearer than that.
This doesn’t imply that the foundation of the FIRE movement is built on sand, but it does mean you need to be prepared for earthquakes. The earlier you retire, the lower your SWR and the more flexible you need to be with your spending.
Problem #2 – One side believes the research findings are outdated and no longer applicable.
Many in the personal finance community believe the 4% Rule overestimates the SWR. Some say 3% is better. Others, like the Financial Samurai, believe that even that is too high and recommend a substantially lower rate of 2% or less. You’ll also hear lots of Dividend Bros promoting living off dividends only and never touching your portfolio’s principal.
Since the updated 4% Rule studies have verified that the strategy continues to work with data through 2025, anyone doubting the rule must believe that the future will be fundamentally different than the past – that stock and bond returns will be lower and/or inflation will be higher than in the past 100 years.
Unless you believe that we will suffer a crash worse than the Great Depression (where stocks lost 95% of their value) or that we will have a period of inflation worse than 1973-1981 (which averaged 9.2% annually), you shouldn’t have to worry. The SWR depends on the percentage you will withdraw from your portfolio when you retire. If you live off your portfolio for 30 years, it is almost certain you will suffer through a bear market and/or a run of inflation. Yet the 4% Rule is still applicable.
Problem #3 – There is a belief on the other side that it is a hard and fast rule that can be followed blindly.
Bengen’s 2012 work is an interesting time capsule of the economic zeitgeist after the GFC. While he concludes that his original research and recommendations still hold, it is evident that he is nervous and making contingency plans. However, in all his writing, he is clear that the SWR should not be followed blindly and that corrections may need to be made along the way.
The Trinity Study authors echo that sentiment. “Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning.”
Other Common Misconceptions
Sequence of Returns Risk (SORR)
A major critique of the 4% Rule is that it doesn’t consider the sequence of return risks (SORR) caused by poor portfolio returns during the first few years after retirement. However, this is simply not true.
These concerns are already baked into the research since the studies include every 30-year period. Naturally, some of these cohorts suffered from a poor sequence of returns, like those at the start of the Great Depression. In fact, this was at the very heart of the research, as before this time, retirement planning was typically based on an analytical approach using long-term average returns.
The Trinity Study authors state, “This analytical approach provides useful insights, but it ignores the critical short-term variations in rates of return. For an investor withdrawing assets from a portfolio, these short-term variations can impact the ultimate outcome that is not reflected using long-term averages. This impact is especially significant for portfolios of common stocks since their returns are highly variable.”
VTSAX And Chill
Many in the FI community invest 100% in stocks, using the so-called “VTSAX and chill” approach. If stocks have a higher average return over time, why have bonds in your portfolio at all? That’s optimization, right? And, since we’ve had a historic run in the U.S. stock market, averaging 14.58% annualized since 2009, that approach has worked. But trees don’t grow to heaven. While it is reasonable to be 100% in stocks when young and working, bonds are imperative in a retirement portfolio.
Both Bengen and the Trinity researchers examined 100% stock portfolios and still recommended bonds in their results. The purpose of a retirement portfolio is survival. Bonds don’t have the same return as stocks because they are less risky. Holding bonds in your portfolio limits your upside but prevents financial ruin during a catastrophic financial event. It is precisely because the 4% Rule was designed to be conservative that A 75%/25% stock/bond mix was considered safest for a 30-year payout period.
Three Other Things People Get Wrong
- The SWR is not based on your net worth but on your invested assets, specifically high-quality corporate bonds and low-cost, broad-based index funds.
- The rule does not account for any other sources of income, including social security, real estate income, or part-time work.
- Bengen specifies that his tested portfolios were continuously rebalanced. While the Trinity study does not explicitly mention it, it is safe to assume their portfolios were similarly rebalanced, as it makes the methodology easier.
Conclusion
Everyone is wrong about the 4% Rule, mainly because they don’t understand or haven’t read the research behind it. While the rule is ultra-conservative by design, over-zealous supporters must beware. The authors laid out specific parameters under which the results apply, which can’t necessarily be extrapolated into other situations. Additionally, flexibility, not rigidity, is suggested during market volatility.
On the other hand, the authors already considered much of what opponents worry about: Inflation, volatility, low bond returns, various interest rate environments, political turmoil, world wars, pandemics, and SORR. The rule is robust because the studies cover such a tumultuous part of American history and because flexibility, not rigidity, is suggested during market volatility.
Despite being over 30 years old, the 4% Rule is not outdated and continues to hold up to scrutiny. The results of the original studies have been independently verified, reworked, and updated, yet the suggested SWR has only increased.
If followed correctly, the only way that the 4% Rule will leave a retiree penniless at the end of a 30-year retirement is if the future is in some way fundamentally different or more extreme than the past. If this is what you believe, then follow another retirement strategy, but know you are being ultra-ultra-conservative. Realistically, followers of the rule are much more likely to end their retirement with multiples of their initial portfolio value than they are eating cat food.
If we experience a greater stock market downturn than the Great Depression, higher inflation than the 1970s, a more destructive global conflict than World War II, or some sort of zombie apocalypse, all bets are off. Otherwise, Keep Calm & 4%.