Does the 4% Rule Work for Early Retirement?

The 4% Rule is a very common topic when it comes to Early Retirement. I would even say that most in the Financial Independence/Retire Early community use it as the basis of determining their “FI Number”. For those not familiar with the term FI Number, this is the number that an individual would need to save to support their lifestyle in retirement. Usually this number is calculated by determining their annual monetary needs and then multiplying that number by 25 (or dividing by 4%).

4% Rule History

The 4% Rule is based on a study by financial advisor William Bengen in 1994. The study reviewed market (stocks and bonds) returns over a 50 year period from 1926 to 1976. The goal of the study was to determine a safe withdrawal rate from retirement savings that could withstand all types of markets, especially down markets. Bengen discovered that a withdrawal rate of 4% survived for a minimum of 33 years. In other words, in all historical cases an individual could survive on a 4% withdrawal rate for at least 33 years in retirement.

Problems with 4% Rule

After reading a significant amount on the topic, I am not comfortable in using it for my early retirement plan for many reasons. First, as mentioned above the determination of “safety” was based on a normal 30 year retirement duration. This timeline changes to 30-60 years for someone pursuing early retirement. The last thing I want to do is to try to get a job at age 70 after 30 year out of the job market because I’m broke. If you run out of money at that point it’s basically catastrophic.

Second, Bengen’s numbers were based on a time period with significantly higher interest rates. This is extremely positive for a portfolio with bonds/CDs/cash increasing its longevity. While interest rates are starting to rise (from literally 0%), it seems unlikely they return to these historical levels anytime soon. Newer research shows that this low interest market could cause as much as 1/3 of retirement accounts to run out.

Third, early retirement makes it exponentially more difficult to predict retirement costs. It is hard enough to guess what taxes, health care, etc. will cost in 30 years. Who knows what they cost in 50 or 60. Quite literally the president at that time might not even be born right now. I’m not comfortable picking a FI Number based on the 4% Rule when I have such poor visibility on my retirement needs.

3% Rule

Due to all of these factors, I am using a 3% withdrawal rate (3% Rule) for my retirement calculations. This does require me to save more money to reach my FI Number. The differences between 3%, 3.5% and 4% are shown in the table and graph below.


This more conservative method compensates for lower portfolio investment returns, and inaccuracies in future living expenses. This also manages some of the risk associated with Sequence of Returns Risk. Also, I plan on working during the first 10 years of retirement to make up the for any negative market returns. This will allow me to conserve my nest egg and improve its longevity.

1 Comment

  1. DA

    I agree with your assessment that 4% is likely too aggressive for folks that want their retirement to last as long as decades more than the original study that was reviewed.

    My problem with the original Bengen study as it relates to early retirees is (a) that the time horizon was 30 years and (b) success was determined if the account balance at 30 years was greater than $0. Bengen said himself in subsequent publications that extended beyond 30 years, the failure rate increases as obviously, the failure rate could only increase as you extend the time period.

    In a way, I think part of the problem with the 4% rule is that it’s catchy and easy to remember. It has saturated the personal finance community, so I think some may take for granted how sound it really is particularly for early retirees. Some of the big names stand behind it, so I fear many don’t question whether something more conservative would be a better idea if you don’t have a plan for additional income sources or your tolerance for volatility isn’t sky high.


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