The 4% Rule: How to Never Run Out of Money in Retirement
You saved $1 Million. Can you quit your job today? The answer lies in a simple math formula called the “Safe Withdrawal Rate.” Follow this rule, and your money should outlive you. Break it, and you might be working at Walmart at age 85.
How to Calculate Your “Freedom Number”
Don’t guess. Do the math.
| Desired Income | Nest Egg Needed (25x) | Monthly Budget |
|---|---|---|
| $40,000 / yr | $1,000,000 | ~$3,300 |
| $60,000 / yr | $1,500,000 | ~$5,000 |
| $100,000 / yr | $2,500,000 | ~$8,300 |
| Scenario | Outcome |
|---|---|
| Stock/Bond Mix | Use 60/40 or 75/25 |
| Cash Only | Will Fail (Inflation) |
The Catch: Inflation Eating Your Lunch
You don’t just withdraw $40,000 every year forever. A gallon of milk will cost $10 eventually. You must give yourself a raise.
How it works in practice:
- Year 1: Portfolio $1M. Withdraw $40,000.
- Year 2: Inflation was 3%. You increase your withdrawal by 3%. Withdraw $41,200.
- Year 3: Inflation was 2%. Increase by 2%. Withdraw $42,024.
The Magic: If invested correctly (Total Stock Market), your portfolio should grow faster than these withdrawals over the long run.
Pro Tip: Is 4% Still Safe in 2026?
People are living longer. If you retire at 30 (FIRE), 30 years isn’t enough. You need the money to last 60 years.
The “3.5% Rule” for Early Retirees
Recommendation: Use a 3.25% – 3.5% withdrawal rate.
It means you need to save a bit more (approx 30x expenses), but it makes your portfolio virtually bulletproof against a 50-year retirement.