The 4% Rule: Your Guide to Sustainable Retirement Withdrawals

Retirement planning can feel like navigating a maze, but the 4% rule is one of the most well-known starting points for thinking about how much you might be able to withdraw from your retirement portfolio each year.

The basic idea is simple: withdraw 4% of your portfolio in the first year of retirement, then increase that dollar amount over time to account for inflation. But the 4% rule is not a guarantee, and it isn't designed to fit every retiree. Your retirement timeline, investment mix, market returns, taxes, pensions, government benefits, and spending flexibility all matter.

What Is the 4% Rule?

The 4% rule is a retirement withdrawal guideline that suggests starting retirement by withdrawing approximately 4% of your investment portfolio during the first year.

In the traditional version of the strategy, the first-year withdrawal is calculated from the portfolio's starting value. In subsequent years, the retiree increases the previous year's dollar withdrawal to account for inflation rather than simply withdrawing 4% of the portfolio's current balance.

This distinction is important. If you retire with $1 million and use a 4% starting withdrawal rate, your first-year withdrawal would be $40,000. If inflation is 2% the following year, the traditional rule would increase the withdrawal to approximately $40,800, regardless of whether the portfolio itself increased or decreased.

Where Did the 4% Rule Come From?

The 4% rule is often associated with the Trinity Study, but the story actually begins earlier.

Financial planner William Bengen published research on retirement withdrawal rates in 1994. His historical analysis examined retirement portfolios using market data going back to 1926 and found that an initial withdrawal rate around 4% had survived historical 30-year periods under the assumptions he tested. Bengen's original work used historical market returns and inflation rather than modern Monte Carlo simulations.

The Trinity Study, published several years later, helped bring the concept to a much wider audience by examining historical stock-and-bond portfolio combinations and different withdrawal rates.

The important takeaway is that the 4% rule is based on historical analysis. It does not mean that withdrawing 4% is guaranteed to work in the future.

A Concrete Example

Imagine you retire with a portfolio worth $1 million.

Using a 4% starting withdrawal rate:

• Starting portfolio: $1,000,000
• First-year withdrawal: $40,000
• Second-year withdrawal with 2% inflation: $40,800
• Third-year withdrawal with another 2% inflation: $41,616

Notice that the withdrawal is not recalculated as exactly 4% of the portfolio every year. Instead, the traditional approach adjusts the original spending amount for inflation.

The Relationship Between the 4% Rule and Investment Growth

A retirement portfolio needs to do more than simply provide withdrawals. It also needs to remain invested so that investment growth can help fund future spending and offset the effects of inflation.

A portfolio containing a combination of stocks and bonds has historically been used in many withdrawal-rate studies. Stocks provide greater long-term growth potential but can experience substantial declines. Bonds generally provide lower long-term growth potential but can provide diversification and income.

There is no single stock-and-bond allocation that makes the 4% rule work. The results of withdrawal research can change significantly depending on the portfolio's asset allocation, fees, inflation, investment returns, and retirement length.

Sequence-of-Returns Risk: What Happens When Markets Dip?

One of the biggest risks facing a new retiree is sequence-of-returns risk.

Two retirees can experience the same average investment return over 30 years but have dramatically different outcomes if their returns occur in a different order. A large market decline early in retirement can be especially damaging because withdrawals are being taken from a portfolio that has already fallen in value.

For example, suppose a retiree starts with $1 million and withdraws $40,000 during the first year. If the portfolio then falls significantly, the retiree is withdrawing money from a smaller asset base. If the retiree continues increasing withdrawals for inflation while the portfolio remains depressed, the damage can compound.

This is why the 4% rule should be viewed as a planning framework rather than a promise that a portfolio will never run out.

1. Withdrawal flexibility: If markets fall sharply, reducing discretionary spending can help preserve the portfolio.
2. Rebalancing: Rebalancing can help maintain the intended investment mix rather than allowing one asset class to dominate the portfolio.
3. Cash reserves: Maintaining an appropriate cash reserve can reduce the need to sell investments immediately after a market decline.
4. Guaranteed income: Pensions and government benefits can reduce the amount that must be withdrawn from an investment portfolio each year.

Is 4% Still a Reasonable Withdrawal Rate?

The answer depends on the assumptions used.

The 4% rule was developed from historical market data, but retirement researchers also examine future-looking assumptions. For example, Morningstar's retirement-income research estimated a 3.7% starting withdrawal rate in its 2024 research for a new retiree seeking a 90% probability of having money remaining after a 30-year retirement, assuming consistent inflation-adjusted spending.

Morningstar's subsequent research increased that baseline to 3.9% for its 2025 research. The study uses forward-looking assumptions rather than simply repeating historical market returns.

These figures don't mean that every retiree should use 3.9% instead of 4%, nor do they mean that someone following the traditional 4% rule will run out of money. They demonstrate that a sustainable withdrawal rate depends on the assumptions being used and the retiree's circumstances.

The 4% Rule Isn't One-Size-Fits-All

One of the biggest limitations of the 4% rule is that it assumes a particular type of retirement. Your situation may be very different.

Consider these factors:

• Retirement length: A 30-year retirement is very different from a 40- or 50-year retirement.
• Age: Someone retiring at 55 may need their portfolio to last much longer than someone retiring at 70.
• Other income: CPP, OAS, Social Security, pensions, rental income, and other reliable income sources can reduce portfolio withdrawals.
• Spending flexibility: A retiree who can reduce discretionary spending during market downturns has more options than someone with a completely fixed budget.
• Taxes: A 4% portfolio withdrawal does not necessarily mean 4% of that amount is available to spend. The tax treatment depends on the account and the retiree's circumstances.
• Investment allocation: A portfolio invested almost entirely in stocks behaves very differently from one heavily weighted toward bonds or cash.

What About a 40-Year Retirement?

The traditional 4% rule was designed around a roughly 30-year retirement horizon. That can be a problem for someone retiring early.

The longer your portfolio needs to support you, the more time there is for poor market returns, inflation, and unexpected expenses to affect the plan.

Current retirement-income research illustrates this issue. Morningstar's 2025 research estimated lower starting withdrawal rates for longer retirement periods than for a traditional 30-year horizon. For someone planning on a 40-year retirement, the research estimated a lower baseline withdrawal rate than the 30-year figure.

This doesn't mean early retirees must follow one specific percentage. It means that retirement duration should be part of the calculation.

Flexible Withdrawals Can Change the Equation

One of the most important developments in retirement-income planning is the increased focus on flexible withdrawals.

The traditional 4% rule assumes that you increase your spending for inflation even when your portfolio has experienced a major decline. In real life, many retirees have some ability to change their spending.

For example, you might decide to:

1. Postpone a major vacation after a significant market decline.
2. Reduce discretionary spending temporarily.
3. Skip an inflation increase in a difficult market year.
4. Increase spending when the portfolio performs particularly well.
5. Use guaranteed income for essential expenses and investments for discretionary spending.

Flexible strategies can make retirement income more responsive to what is actually happening in the portfolio rather than assuming that markets will cooperate every year.

Using the 4% Rule With Pensions and Government Benefits

The 4% rule is generally discussed in terms of investment portfolios, but most retirees have more than one source of retirement income.

For example, a Canadian retiree might receive CPP and OAS along with an employer pension and withdrawals from RRSPs, RRIFs, TFSAs, and non-registered investments.

If your essential expenses are largely covered by reliable retirement income, you may not need to withdraw 4% of your portfolio simply because the rule says you can.

Conversely, someone relying heavily on investments to fund essential expenses may need a more detailed retirement-income analysis.

Common Mistakes With the 4% Rule

• Treating 4% as a guarantee: Historical success does not guarantee future results.
• Ignoring taxes: Portfolio withdrawals and spendable income are not always the same thing.
• Ignoring retirement length: A 40-year retirement requires different planning from a 20-year retirement.
• Ignoring other income: CPP, OAS, Social Security, pensions, and other income can materially change how much must come from investments.
• Never adjusting spending: Some retirees have the ability to reduce discretionary spending when markets perform poorly.
• Focusing only on the percentage: The dollar amount you actually need to spend matters just as much as the withdrawal percentage.

Balancing Act: Using the 4% Rule Wisely

The 4% rule can be a useful starting point, but retirement planning works better when it treats the rule as a guideline rather than a rigid formula.

A more complete retirement plan should consider:

1. Your retirement age and expected lifespan
2. Your investment portfolio and asset allocation
3. Your expected spending
4. Inflation
5. Taxes and account types
6. CPP, OAS, Social Security, pensions, and other income
7. Your ability to adjust spending

This is where retirement planning software can be particularly useful. Instead of asking only, "Can I withdraw 4%?", you can model different spending levels, retirement ages, market scenarios, income sources, and withdrawal strategies.

Bring It Home With Retirementize

Understanding the 4% rule is a great starting point, but your retirement is more complicated than a single percentage.

Retirementize lets you build a detailed retirement plan around your own goals, income sources, spending needs, accounts, pensions, and retirement timeline. You can explore how your portfolio may respond to different assumptions instead of relying on a single rule of thumb.

The goal isn't simply to withdraw a certain percentage. The goal is to understand how much you can spend while balancing today's lifestyle with the possibility of living many more years.

After all, retiring too rich might sound like a luxurious problem, but the real goal is to retire just right.

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