Staring at your retirement account balance, you wonder: “Will this last?” If you’re part of the FIRE movement (Financial Independence, Retire Early), you’ve likely heard of the 4% rule – the ultimate back-of-the-napkin math for retirement withdrawals. But does it actually work forever? Let’s break it down.
What the 4% Rule Actually Means
The 4% rule is simple:
1. Withdraw 4% of your portfolio in year one of retirement.
2. Adjust for inflation each year afterward.
For example, a $1M portfolio lets you withdraw $40,000 in year one. If inflation is 2%, you’d take $40,800 in year two. This strategy aims to make your savings last 30+ years.
Developed in the 1990s by financial planner William Bengen, it’s based on historical market data showing that balanced portfolios (50% stocks/50% bonds) survived even the Great Depression and 1970s stagflation. But millennials face new challenges: longer lifespans, unpredictable markets, and retiring decades earlier than traditional workers.
Why the FIRE Movement Loves (and Wrestles With) the 4% Rule
For early retirees, the 4% rule is a starting point. Here’s how it connects to FIRE:
The Math Behind FI:
| Annual Expenses | Target Portfolio (25x Expenses) | 4% Withdrawal |
|——————|———————————-|—————|
| $40,000 | $1,000,000 | $40,000/year |
| $60,000 | $1,500,000 | $60,000/year |
This “25x expenses” model fuels FIRE plans. But aggressive saving is required:
– Retiring at 40? You’d need to save 50–70% of your income.
– A 30-year-old earning $100k/year would need to invest ~$2,275/month for 15 years (assuming 5% returns) to hit $600k.
The Catch:
– Sequence-of-return risk: Poor market performance early in retirement can derail portfolios.
– Infinity problem: The rule was designed for 30-year retirements — not 50+ years.
Making the 4% Rule Work for Early Retirement
1. Build a Resilient Portfolio
– Diversify beyond stocks/bonds: Add real estate, dividend stocks, or side hustles.
– Keep fees below 0.5%: High fees erode returns over decades.
– *Example*: Sarah, 35, splits her $1.2M portfolio into index funds (60%), rental properties (30%), and bonds (10%) to hedge volatility.
2. Stay Flexible With Spending
– Ratchet up in good years: If your portfolio grows 50%, boost withdrawals by 10%.
– Cut back during downturns: Trim discretionary spending if markets drop >20%.
– *Reality check*: The Happy Saver blog cut withdrawals during the 2022 downturn, preserving 80% of their portfolio.
3. Plan for Hidden Costs
– Healthcare: A 40-year retiree might spend $300k+ out-of-pocket.
– Taxes: Withdrawals from 401(k)/IRA accounts are taxed as income.
The Verdict: It’s a Guide, Not a Gospel
The 4% rule works as a baseline, not a bible. For millennials:
– Optimize your number: Use 3–3.5% for retirements >40 years.
– Stress-test your plan: Tools like FIRECalc simulate worst-case scenarios.
– Earn more, spend less: Side hustles or geoarbitrage (moving to lower-cost areas) boost savings rates.
Start now. Track your spending. Invest relentlessly. Whether you retire at 45 or 55, the 4% rule is a compass — but you’ll need to navigate storms along the way.