If you're interested in financial independence, you've probably heard of the 4% Rule. But what is it, and does it still work?
Created by financial advisor William Bengen in 1994, the 4% rule states that you can withdraw 4% of your retirement portfolio in your first year, adjust that dollar amount for inflation each subsequent year, and have a high probability of not running out of money for 30 years.
Your "Freedom Number" = Annual spending ÷ 0.04
Example: If you need $50,000/year to live comfortably: $50,000 ÷ 0.04 = $1,250,000
The 4% rule was based on historical market data from 1926-1992. Since then, interest rates have been lower and life expectancy has increased. Many financial experts now recommend 3-4% depending on your age and risk tolerance.
If you plan to retire at 40 instead of 65, you need your money to last 50+ years. The 4% rule becomes riskier. Many in the FIRE community use 3-3.5% for longer retirements.
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