The quick maths: yearly spending × 25
Think about how much you want to live on each month and turn it into a year. $3,000 a month is $36,000 a year. Multiply by 25 and you get $900,000. That is roughly the invested amount that would let you take out $36,000 every year without running out of money for 30 years, in most historical scenarios.
Multiplying by 25 is the same as saying you withdraw 4% of your pot each year. That is where the name “4% rule” comes from.
Where the 4% comes from
In the 1990s, adviser William Bengen and later a study from Trinity University looked at what would have happened to US retirees since 1926. Taking out 4% in the first year, and then raising that amount with inflation, lasted at least 30 years in almost every period, including the worst ones such as the Great Depression and the 1970s.
The idea behind it is simple: if your portfolio grows on average by more than you take out, the money you withdraw mostly comes from gains and the bulk of your capital stays put.
Why many people use 3.5% or 3%
The study uses US data, one of the best markets of the last century. With data from other countries, or if the money has to last 40 or 50 years because you retire early, many analyses point to something more cautious.
At 3.5%, the same $36,000 a year needs about $1,030,000. At 3%, $1,200,000. It is not an exact science: it is a range, and knowing where you sit within it is already a lot.
The risk almost nobody looks at: the order of the years
Two people can get the same average return and end up in very different places. If the market falls hard right in your first years of withdrawals, you sell cheap to pay your bills and that money never comes back. If the same fall arrives twenty years later, it barely touches you.
Two things help: keeping one or two years of spending in cash so you do not have to sell in the middle of a crash, and being willing to spend a little less in bad years.
What the rule leaves out
The figures are before taxes and fees. If your funds charge 1% a year, your margin shrinks a lot in practice. It also ignores any state pension: if you will receive one, you need less capital, because it only has to cover the difference.
Frequently asked questions
How much do I need to live on $4,000 a month?
That is $48,000 a year. With the 4% rule, about $1.2 million. With a more cautious 3.5%, about $1.37 million.
Does the 4% rule work outside the US?
The multiplication is the same in any currency. What changes is the expected return of your portfolio and your country’s taxes, so many people outside the US prefer 3.5%.
What if I retire at 45?
If the money has to last 45 years or more, 3% or 3.5% gives you a lot more room than 4%.
More guides
Educational content. Not financial advice: past returns do not guarantee future ones.