How to Use the 4 Percent Rule

Learn how to calculate a sustainable retirement withdrawal rate and understand the limitations of the 4 percent rule for your long-term plan.

1. Calculate your total portfolio. Add up the value of your liquid assets, such as brokerage accounts and retirement accounts, that you intend to use for income. Ignore home equity or assets you do not plan to liquidate. This is your total 'nest egg' amount.
2. Apply the 4 percent benchmark. Multiply your total portfolio by 0.04. This number represents the amount you can withdraw in your first year of retirement. For example, a $1,000,000 portfolio allows for an initial annual withdrawal of $40,000.
3. Adjust for inflation annually. In your second year, take your initial dollar amount—not the portfolio percentage—and increase it by the rate of inflation. Continue this pattern each year regardless of how the stock market performed. This protects your purchasing power over a 30-year timeframe.
4. Identify when the rule fails. The 4 percent rule assumes a 30-year horizon with a balanced portfolio of stocks and bonds. If you plan to retire for 40 or 50 years, or if your portfolio is held in cash, this percentage is likely too high. You must lower the withdrawal rate to increase your safety margin.
5. Stress test your plan. Use a retirement calculator to run 'Monte Carlo' simulations, which model thousands of market scenarios. If your plan fails in more than 10% of those scenarios, consider lowering your starting withdrawal to 3% or 3.5%. Never treat a static percentage as a guarantee of success.