The 4% Rule Explained
The 4% rule says you can withdraw 4% of your portfolio in your first year of retirement and adjust that amount for inflation each year, without running out of money over roughly 30 years. In other words, you need about 25 times your annual spending. Here are the origin, a worked example, and the limits.
What the 4% rule actually says
In the first year you withdraw 4% of your assets, then raise that euro amount each subsequent year by inflation. With a €500,000 portfolio, that is €20,000 in the first year (around €1,667 per month). The rule comes from the U.S. Trinity Study, which examined historical market data across 30-year periods.
Example: how much capital do you need?
25× your annual spending (sample calculation)
| Spending/month | Spending/year | Capital required |
|---|---|---|
| €1,000 | €12,000 | €300,000 |
| €2,000 | €24,000 | €600,000 |
| €3,000 | €36,000 | €900,000 |
| €4,000 | €48,000 | €1,200,000 |
The weaknesses of the rule
- Sequence-of-returns risk: a crash right at the start of the withdrawal phase can permanently weaken the portfolio.
- Longer retirements: anyone retiring at 40 (40+ years) should withdraw more cautiously — closer to 3 to 3.5%.
- Taxes: the 4% is gross; taxes reduce the amount you actually have available (in Germany this is the flat capital-gains tax, and taxes apply in your country too).
- U.S. data: the study is based on historical U.S. markets — no guarantee for the future or for other countries.
The 4% rule is a useful rule of thumb for planning, not a guaranteed promise. It worked in most historical periods, but failed in a few unfavourable ones. Staying flexible — withdrawing a little less in bad years — increases your safety considerably.
A worked example: a €500,000 portfolio over 30 years
What does the rule actually look like over three decades? Say you retire with €500,000, withdraw €20,000 in year one and raise that amount by 2% inflation every year. Your portfolio returns an average of 5% per year. Withdrawals and portfolio value then develop like this:
Withdrawal plan: €500,000 start, 5% return, 2% inflation
| Year | Withdrawal that year | Portfolio at year end |
|---|---|---|
| Year 1 | €20,000 | €504,000 |
| Year 10 | €23,900 | €527,500 |
| Year 20 | €29,100 | €509,500 |
| Year 30 | €35,500 | €403,600 |
The result surprises most people: over 30 years you withdraw roughly €811,000 in total — far more than the original €500,000 — and still end up with about €400,000 left. The reason is that returns grow the portfolio faster than withdrawals drain it in the early years. Up to around year 15 the portfolio value actually rises; only after that does the principal slowly start to shrink.
The maths breaks down, however, if returns stay persistently low: at only 3% per year, the same portfolio would be fully depleted just before year 30. That is exactly why the 4% rule is a planning tool for an equity-heavy portfolio — it does not work on cash or bond yields alone.
The table assumes a constant 5% every year. Real returns swing wildly, and the order matters: if the weak years come first, you withdraw from a shrunken portfolio and miss the recovery on every euro you take out. A cash buffer of two to three years of expenses, which you draw on during crash years, defuses precisely this risk.
FAQ — the 4% rule
What is the 4% rule, explained simply?
The 4% rule says you can withdraw 4% of your accumulated assets in your first year of retirement and then adjust that amount for inflation each year, without running out of money over roughly 30 years. In practical terms, you need about 25 times your annual spending to make it work.
How much money do I need under the 4% rule?
You need around 25 times your annual spending. If you need €2,000 a month (€24,000 a year), that comes to about €600,000. At €1,000 a month, it is roughly €300,000. These figures are gross, before taxes.
Is the 4% rule still safe?
It is considered a usable guideline, but it is not a guarantee. With very long retirements, high market valuations, or a crash at the start of the withdrawal phase, a more cautious rate of 3 to 3.5% can make more sense. Withdrawing flexibly increases your safety.
Where does the 4% rule come from?
It goes back to the U.S. Trinity Study from the 1990s, which analysed historical stock and bond returns over 30-year periods. It found that an inflation-adjusted withdrawal of 4% lasted 30 years in most of those periods.
What happens if markets crash right after I retire?
That is the single biggest risk to the rule, known as sequence-of-returns risk: you end up withdrawing from a shrunken portfolio, and every euro you take out misses the recovery. Practical defences are a cash buffer of two to three years of expenses that you spend during the crash, and flexible withdrawals — for example skipping the inflation adjustment in bad years. Even small cuts during the first five years measurably improve how long the portfolio survives.
Is the 4% rule calculated before or after taxes and fees?
Before. The rule works with gross withdrawals, so capital gains tax in your country and fund costs come on top. Two things soften the blow: only the gain portion of each sale is taxed, not the full withdrawal, and a cheap ETF portfolio costs just 0.1–0.2% per year. Many planners simply use a slightly lower personal rate — 3.5% instead of 4% — to leave room for taxes and costs.