The 4% rule is the most widely cited framework for retirement planning. But most people misunderstand how it works — and get the wrong number.
Here's the math, the caveats, and how to actually use it.
What is the 4% rule?
The rule states that if you withdraw 4% of your portfolio in year one of retirement, and adjust that amount for inflation each subsequent year, your portfolio has a very high probability of lasting 30 years.
It comes from the Trinity Study (1998), which backtested withdrawal rates using historical US stock and bond returns.
The basic formula
Annual spending ÷ 0.04 = Your FI number
Examples:
- Spend €24,000/year → need €600,000
- Spend €40,000/year → need €1,000,000
- Spend €60,000/year → need €1,500,000
Critical caveats developers should know
1. It assumes a 30-year horizon
The original study modeled 30 years. If you retire at 40, you need 50+ years of coverage. A safer rate for early retirement is 3-3.5%.
2. Sequence of returns risk
If the market crashes in year 1-3 of retirement, it can permanently impair your portfolio even if long-term returns are fine. This is why having 1-2 years of expenses in cash or bonds matters.
3. It doesn't account for taxes
Depending on the country and account type, your withdrawals may be taxed as income or capital gains. Your gross portfolio need is higher than your net spending suggests.
How we modeled it
At vextorcapital.com, our FIRE calculator lets you input:
- Current savings and monthly contributions
- Expected annual return (real, post-inflation)
- Target withdrawal rate (3%, 3.5%, or 4%)
- Country-specific tax treatment
The result: your precise FI number and years to reach it.
Try it free — no signup required.
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