The 4% rule: where it comes from and what it leaves out

The 4% rule is the best-known number in early retirement planning. It comes from a 1994 study by the US financial planner William Bengen, and it answers a specific question: 30 years of retirement, a portfolio of stocks and bonds, withdrawals that rise with inflation. Status: October 2026.

What Bengen tested

For every starting year from 1926 to 1976, Bengen calculated how long a portfolio of 50 % US stocks and 50 % intermediate-term US Treasuries, rebalanced each year, would have lasted. His findings:

• A 3 % first-year withdrawal lasted at least 50 years in every case.
• 4 % never ran out in less than 33 years, and usually lasted 50 years or longer.
• 4.25 % could have emptied a portfolio in as little as 28 years.
• He recommended a stock share between 50 % and 75 %.

He assumed tax-deferred accounts, so no tax on returns. The later “Trinity study” by Cooley, Hubbard and Walz (1998) tested data from 1926 to 1995, withdrawal rates from 3 % to 12 % and periods of 15 to 30 years, also without tax or costs. It too concluded that longer retirements need lower rates.

How the math works

target portfolio = annual spending from the portfolio × 25

Example: besides other income you need €30,000 a year from your portfolio. The rule says you need €30,000 × 25 = €750,000. In year one you withdraw €30,000. With 2.2 % inflation, Germany’s rate for 2025, year two is €30,660, regardless of how markets did. The 4 % refers only to the starting value.

What it leaves out, especially in Germany

• Tax. The gain portion of each withdrawal pays the flat tax, about 18.5 % effective on equity ETFs thanks to the Teilfreistellung. If you need €30,000 after tax, you must withdraw more.
• Health insurance. If you stop work before your pension and stay in public insurance without family cover, you are a voluntary member and pay contributions on investment income too (§ 240 SGB V).
• Costs. The studies ignore fund fees. Every point of cost lowers the sustainable rate.
• Other markets. The data are 20th-century US returns. Nobody knows whether the future will look similar, or how a euro investor’s experience will differ.
• Longer horizons. Retiring at 45 means planning for 40 years or more. Bengen himself saw 4 % as fitting mainly for people aged 60 to 65.

Common misunderstandings

• “Take 4 % of the current value every year.” That is a different strategy. In Bengen’s version the real amount stays the same whatever markets do.
• “4 % is safe.” It is the rate that would have lasted in the past, not a guarantee.
• “25 times spending and I am done.” Only if spending, tax and insurance are counted correctly and the time horizon fits.

In your plan

The rule is a good starting point for how much you need. How long your portfolio actually lasts at your withdrawal rate is what how long will my money last works out, and the FIRE calculator shows when you reach it. The biggest threat to the rule is sequence of returns risk, bad years right after you start. What you can do if it happens is the subject of the guide retirement spending guardrails.