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Financial independence fundamentals

Withdrawal rates and the 4% rule

The 4% rule is the best-known shortcut in financial independence planning. This guide explains the research behind it, what it assumed, where later studies disagreed, and how to use a withdrawal rate sensibly in your own plan.

By Yield ClarityPublished 4 min read

Key takeaways

  • The 4% rule describes the worst historical outcomes in US data for about 30-year retirements.
  • It assumed a fixed, inflation-linked withdrawal with no allowance for fees or tax.
  • International research found 4% less reliable outside the US.
  • Longer retirements and rigid spending generally call for a lower rate.

What a withdrawal rate is

A withdrawal rate is the share of your portfolio you take as income in the first year of retirement. In the classic approach, that first amount is then increased with inflation each year, regardless of how markets perform.

Because the rate sets how large a portfolio you need, it also sets your FI number.

Where the 4% figure came from

Bengen, 1994

Financial planner William Bengen tested withdrawal rates against US stock and bond returns from 1926. He found that a 4% first-year withdrawal, increased with inflation, did not exhaust a portfolio in under 33 years in any of the historical periods he tested, with roughly 50% to 75% in shares. His original paper did not include taxes or investment fees.

The Trinity study, 1998

Three professors at Trinity University tested different withdrawal rates and asset mixes over 15, 20, 25 and 30-year periods of US history. Their results suggested that portfolios mostly in shares could sustain inflation-adjusted withdrawals of 4% to 5% in most historical periods, with success falling as the rate or the length of retirement increased.

What the research assumed

The headline finding depends on conditions that may not match your plan.

Assumptions behind the classic studies and why they matter

  • US market history

    Why it matters
    The US had one of the strongest stock markets of the 20th century. Other markets may not repeat it.

  • About 30 years of retirement

    Why it matters
    Someone stopping work at 45 may need money for 40 to 50 years.

  • No fees or tax

    Why it matters
    Fund and platform charges and income tax reduce what you can spend.

  • Rigid inflation-linked spending

    Why it matters
    People often adjust spending after bad years, which helps a portfolio last.

  • Specific asset mixes

    Why it matters
    Results differ for portfolios with more cash, bonds or other assets.

The international picture

Wade Pfau repeated the historical analysis for 17 countries over 109 years. He found that a 4% withdrawal rate would have been sustainable over 30 years in only a minority of them. Results for the UK were weaker than for the US.

That does not mean 4% will fail. Historical results describe the past, and the future may be better or worse. It does suggest that investors outside the US should not treat the US figure as a floor.

Longer retirements need more caution

A simple way to see why the length of retirement matters: if your investments only kept pace with inflation, the withdrawal rate alone would set how many years your money lasts.

Years funded if investments only matched inflation

  • 3%

    Years funded
    33.3
    Target for £42,000
    £1,400,000

  • 3.5%

    Years funded
    28.6
    Target for £42,000
    £1,200,000

  • 4%

    Years funded
    25
    Target for £42,000
    £1,050,000

  • 4.5%

    Years funded
    22.2
    Target for £42,000
    £933,333

  • 5%

    Years funded
    20
    Target for £42,000
    £840,000

Real returns above inflation stretch these figures; poor returns early in retirement shorten them. That second effect is sequence-of-returns risk.

Choosing a rate to plan with

There is no single right answer. These questions can help you decide what to test.

  • How long might your retirement last? Earlier and longer retirements point to lower rates.
  • How flexible is your spending? If you could cut back after a bad year, a slightly higher rate may be tolerable.
  • Do you have other income later, such as a state pension? That can reduce what the portfolio must fund in later years.
  • How much would running short matter compared with leaving money unspent?

Many people compare a few rates, for example 3%, 3.5% and 4%, and look at how much the target and date change. A Monte Carlo simulation adds a view of how often the plan lasts under varying returns.

How Yield Clarity uses the withdrawal rate

Your withdrawal rate sets your FI target: retirement income ÷ rate. After FI, withdrawals rise with inflation by default, or you can choose a fixed amount or a percentage of the portfolio. On paid plans, the sustainability check follows each simulated path for 15 years after retirement by default and shows how often the money lasts. See retirement sustainability in the methodology.

Sources

  1. Determining Withdrawal Rates Using Historical Data. William P. Bengen, Journal of Financial Planning, October 1994. Historical research using US market data.
  2. Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable. Cooley, Hubbard and Walz, AAII Journal, February 1998. Historical research using US market data, often called the Trinity study.
  3. An International Perspective on Safe Withdrawal Rates. Wade D. Pfau, Journal of Financial Planning, December 2010. Historical research across 17 countries.
  4. Methodology: how Yield Clarity calculates your plan. Yield Clarity. How the product implements the ideas in this guide.

This guide is general information, not financial advice. Figures for the illustrative plan are examples, not market data.

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