What Is the 4% Rule? The Retirement Withdrawal Rule Explained Simply

The short answer

The 4% rule is a retirement withdrawal guideline: in your first year of retirement, withdraw 4% of your portfolio, then adjust that dollar amount for inflation each year after. Retire with $1,000,000 and you take $40,000 in year one, then roughly $40,000 plus inflation in year two, and so on. The idea is that this pace should let your money last about 30 years.

The rule comes from the Trinity study, a 1998 paper by three professors at Trinity University in Texas. They tested withdrawal rates against actual US stock and bond returns from 1926 to 1995. A 4% withdrawal from a portfolio of at least 50% stocks survived every 30-year window they tested. It wasn't a promise — it was a backtest, and that's why the rule should be a starting point for your plan, not the plan itself.

Here's the simple math: 4% is the inverse of 25x. If you can live on $60,000 a year, the rule implies you need $1,500,000 saved (25 × $60,000). That's the same FIRE number math from earlier in this series — the 4% rule is the withdrawal side of the same coin.

How the 4% rule actually works

Take a concrete Canadian example. You retire at 60 with a $900,000 portfolio spread across a TFSA, an RRSP, and a non-registered account. In year one, you withdraw 4%: $36,000. If inflation runs at 2%, your year-two withdrawal is $36,720. In year three, you adjust again. You never recalculate 4% of the current balance — you lock in the first year's dollar amount and inflation-adjust it.

Why not just take 4% of the current balance each year? Because then your income swings with the market — down 20% in a year your portfolio drops 20%. The inflation-adjusted method gives you a steady retirement paycheck instead.

Portfolio mix matters. The 4% result held for portfolios with at least 50% stocks; a 100% bond portfolio failed in many periods because bonds alone didn't outpace inflation over 30 years. A 75/25 stock/bond mix had the highest success rate in the study. The rule assumes you're still invested for growth in retirement, not hiding in cash.

What the rule gets right

First, it forces you to think in terms of a withdrawal rate, not a lump sum. "$1 million" sounds like a lot until you translate it: $40,000 a year, before tax, before CPP and OAS. Second, it bakes in bad luck — the rule survived the Great Depression, 1970s stagflation, and the dot-com crash. Third, it's simple enough to actually use: a rule you can calculate on a napkin beats a perfect model you never run.

For Canadians, the rule pairs naturally with the drawdown order most retirees follow: non-registered accounts first, then RRSPs (mindful of tax brackets), letting the TFSA grow tax-free as long as possible. You can model this exact tradeoff in FIRE Lab — it's free, runs entirely in your browser, and your numbers never leave your device.

Where the rule breaks down

The biggest limit is the time horizon. The study tested 30-year retirements. Retire at 45 and you're planning for 40 to 50 years — and research on longer horizons points to around 3.5%. On $1,000,000, the difference between 4% and 3.5% is $5,000 a year, every year.

Second, the rule assumes US market history repeats itself. Future returns could be lower: today's high valuations and low bond yields may make the next 30 years look worse than the last 90. Bengen, who originated the 4% figure in 1994, later revised his estimate to about 4.7%; other researchers argue for 3.3% or lower. The honest range is roughly 3.5% to 4.5%.

Third, the rule ignores taxes and fees. A 4% gross withdrawal from an RRSP isn't $40,000 in your pocket — at a 30% marginal rate it becomes $28,000, while TFSA withdrawals are tax-free. And a 2% mutual fund fee quietly eats half your withdrawal rate before you spend a dollar.

Fourth, sequence risk. Retiring into a bear market means selling depressed assets to fund withdrawals, permanently shrinking the portfolio. The data includes those scenarios and 4% still held — but "held" sometimes meant ending with almost nothing left.

A worked example: the $60,000 retirement

You want to spend $60,000 a year in retirement, in today's dollars, and you expect about $20,000 a year combined from CPP and OAS once those start (a reasonable ballpark for a full CPP history with payments delayed to 65; your numbers will differ). That leaves a $40,000 annual gap your portfolio must cover.

At 4%, you need $1,000,000 saved. At a more conservative 3.5% — sensible if retiring before 55 — you need about $1,143,000; at 3.25%, roughly $1,231,000. Each quarter-point of caution adds roughly $70,000 to $90,000 to the target.

Now the Canadian tax wrinkle. If that $40,000 gap comes entirely from an RRSP, you might keep only $28,000 to $30,000 after tax. To actually spend $40,000, you might need to withdraw closer to $55,000 — pushing your target from $1,000,000 to nearly $1,375,000 at 4%. TFSA dollars are worth more than RRSP dollars, dollar for dollar, because the tax is already paid. Before deciding how much you really need, run your own numbers through FIRE Lab's free scenario modeler — no signup, nothing leaves your device.

How to use the rule without misusing it

Treat 4% as a planning anchor and a guardrail, not a contract:

• Use 4% to size your target. Multiply your annual spending gap by 25. That's your first-pass FIRE number.
• Adjust for your horizon. Retiring at 65 for 30 years? 4% is a reasonable anchor. Retiring at 45? Plan closer to 3.5%.
• Build in flexibility. Cutting spending by 10% in bad market years dramatically improves survival odds. A rule with a pressure valve beats a rigid one.
• Revisit annually. Recalculate your withdrawal rate against your current portfolio and spending each year. If you're at 5% because markets fell, that's a signal to trim — not panic, just trim.
• Count taxes separately. Convert your spending target into the gross withdrawal you actually need, account by account, before applying the rule.

Used this way, the rule turns an abstract pile of money into a testable income plan. It tells you whether $800,000 is enough (at 4%, $32,000 a year — probably not, if you want $60,000). That clarity beats false precision.

Frequently asked questions

Is the 4% rule still safe in 2026?

It's still a reasonable planning anchor, but with wider uncertainty than the original study suggested. Most current research lands between 3.5% and 4.5%; early retirees should plan toward the lower end.

Does the 4% rule work in Canada?

The mechanics work the same, but taxes change the result. TFSA withdrawals are tax-free, RRSP withdrawals fully taxable, non-registered withdrawals trigger capital gains tax. Apply the rule to after-tax spending, not gross withdrawals.

What if I retire early — is 4% too high?

Probably, yes. The study tested 30-year retirements; a 40- to 50-year retirement faces more bad sequences and inflation, and research points to roughly 3.5% or lower for very early retirees.

Should I adjust for inflation every year?

Yes — that's how the rule is defined. Skip the adjustment and your spending power erodes: at 2% inflation, $40,000 loses about a third of its purchasing power over 20 years.

What happens if my portfolio drops right after I retire?

That's sequence risk, and the defence is flexibility, not panic. Trim discretionary spending for a year or two or pause inflation adjustments — small, early changes have an outsized effect on survival.

Tomorrow: How Do I Start My FIRE Journey With Zero Savings?