What the 4% Rule Actually Promises

If you have read anything about retirement, you have probably met the 4% rule. It works like this:

• Take 4% of your savings in the first year you are retired
• Raise that dollar amount with inflation every year afterward
• Your money should last about thirty years

It is the most repeated number in retirement planning, and where it came from is much less well known. The word should in that last line is doing more work than it looks. It is easy to read the formula as a promise of thirty years.

Where the number came from

In 1994 a financial planner named William Bengen put one question to US market history back to 1926. What is the highest first-year withdrawal rate that would have survived every thirty-year stretch? He included the stretches that began just before a crash, which is the whole point of the test.

The answer was 4.1%, rounded off to the 4% rule. The test measured one thing: whether the money lasted.

That number today

Bengen's 4.1% came out of data ending in the early 1990s. Others have asked the same question since, using fresher data.

Morningstar ran its own study and put the safe withdrawal rate for someone retiring in 2026 at 3.9%. That figure rests on three terms that rarely get quoted with it:

• A retirement lasting thirty years
• A portfolio holding 30% to 50% in stocks
• A 90% chance of success

Two of those deserve a closer look.

1. A portfolio holding 30% to 50% in stocks. You have to decide how much market risk to carry on a large share of your savings.
2. A 90% chance of success. One retiree in every ten finds out that their plan had an end date.

One more thing about the 3.9%. The formula raises your withdrawal with inflation each year and ignores what markets actually did. That holds up until a bad stretch arrives early. Losses in the first years, on top of withdrawals, are what create the one case in ten. That pattern is called sequence of returns risk. Getting around it usually means spending less for a while. That cut comes straight out of the money you live on.

What it looks like in real dollars

Say you retire with $1,000,000, a large sum by any measure.

• Savings at retirement: $1,000,000
• Starting withdrawal at 3.9%: $39,000 in the first year

Most of that million usually sits in a 401(k) or an IRA you have not paid tax on yet. So every dollar of that $39,000 counts as income, and the check you keep is smaller.

The withdrawal rate tells you what your savings can produce. Your life tells you what you need to live the way you want. Those are two different numbers, and comparing them is the useful work.

So run it the other way around. Start with what a year of your retirement actually costs. Then add the tax on anything drawn from a 401(k) or an untaxed IRA. That total is what your savings has to produce. Set it against 3.9% of what you have saved. If that covers your costs with room to spare, you are in good shape. If it falls short, your retirement income needs another look.

The trade-off behind both choices

There are two ways to turn savings into retirement income, and each gives up something. You can draw down your invested savings. Or you can buy guaranteed lifetime income, which usually means an annuity.

Neither one is the wrong answer. For most families the best answer is a mix of the two. Steady income covers the bills that never stop, and the savings do the rest of the work. That mix rebuilds the pension your parents retired on. I have also written about why the income floor comes first.

The number you are told is safe will keep moving, because it is a forecast rather than a promise. So it is worth knowing which parts of your retirement rest on a forecast, and which rest on a contract.

If you would like to see how that split looks across your own savings, I am happy to work through it with you.