The 4% Rule: Build the Retirement Plan Around the Benchmark

A one-per­cent­age-point change can move a re­tire­ment target by €200,000. If you want €40,000 from your port­fo­lio in the first year, 3% needs about €1.33 mil­lion, 4% needs €1 mil­lion, and 5% needs €800,000.

Define what 4% means

William Ben­gen’s 1994 analy­sis used a first-year with­drawal based on the ini­tial port­fo­lio, then in­creased that euro amount with inflation.^[1] Retire with €1 mil­lion at 4%, and you with­draw €40,000 in year one. With 3% inflation, you with­draw €41,200 in year two.

That method dif­fers from taking 4% of the cur­rent bal­ance every year.

Name the method when­ever you quote a with­drawal rate.

Extend the hori­zon and vary the strat­egy

Bengen tested his­tor­i­cal US data, while Cooley, Hub­bard, and Walz tested rates from 3% to 12%, sev­eral stock-bond mixes, and 15- to 30-year pe­ri­ods. Both stud­ies ex­cluded taxes and trans­ac­tion costs.^[1][2]

A FIRE plan that starts at 40 may need 50 years. A longer hori­zon cre­ates more spend­ing years and more chances to meet poor mar­kets, high inflation, or a large one-off cost.

A simple 3% real-re­turn model shows the hori­zon effect for €40,000 of annual spend­ing:

$$P = W\frac{1-(1+r)^{-n}}{r}$$

The smooth model has no volatil­ity, so these figures do not es­tab­lish a safe with­drawal rate. They show why the fund­ing hori­zon changes the cap­i­tal re­quire­ment.

A flex­i­ble spend­ing rule can help after a draw­down. If your €40,000 budget in­cludes €8,000 of travel, you might cut €5,000 for one year after a 20% fall. Define the rule before re­tire­ment and model the spend­ing you would ac­tu­ally accept.

See se­quence risk with re­turns re­orderedFollow two re­tirees with the same wealth and return set as with­drawals push their out­comes apart.→

Add your real cash flows

A 4% bench­mark cannot sched­ule a €50,000 ren­o­va­tion, start a pen­sion at 67, or ac­count for taxes on dif­fer­ent ac­counts. Put those events on the time­line.

A 4% start­ing rate also says noth­ing about whether your port­fo­lio holds 20% or 80% in eq­ui­ties. More growth assets can raise long-term return as­sump­tions and deepen short-term losses. Lower volatil­ity can reduce draw­downs and lower ex­pected growth.

Keep gross with­drawals sep­a­rate from net spend­ing. Your coun­try, ac­count struc­ture, other income, and with­drawal com­po­si­tion de­ter­mine the tax gap.

Turn the bench­mark into a pro­jec­tion

1. Set the re­tire­ment date and plan­ning hori­zon.
2. Enter es­sen­tial and dis­cre­tionary spend­ing by year.
3. Add pen­sions and other income when they begin.
4. Add one-off ex­penses and taxes.
5. Choose the port­fo­lio al­lo­ca­tion and return as­sump­tions.
6. Test fixed and flex­i­ble with­drawal rules.
7. Stress-test poor re­turns near re­tire­ment.
8. Compare the result with a later re­tire­ment date or lower spend­ing.

Fignis lets you change one de­ci­sion while hold­ing the rest of the cash-flow model steady. Com­pare a 3.5% start­ing rate with 4%, or com­pare fixed spend­ing with a cut after a crash.

Use 4% to es­ti­mate a target and 3% or 5% to mea­sure sen­si­tiv­ity. Then let dates, cash flows, and stress tests decide whether the bench­mark fits your life.

Con­nect the rate to your FIRE targetSee how a single FIRE number com­presses pen­sions, taxes, hous­ing, spend­ing changes, and market risk.→