The 4% rule has become the unofficial gospel of the FIRE movement. Save 25 times your annual expenses, withdraw 4% each year, and you’re set for life. It’s an elegant formula that’s launched countless spreadsheets and early retirement dreams.
But here’s the thing: the 4% rule wasn’t designed for FIRE.
The research behind this guideline assumed a 30-year retirement. If you’re planning to retire at 40 and live to 90, you’re looking at a 50-year runway. That changes the math in ways that matter.
Where the 4% Rule comes from
Financial planner William Bengen first proposed the 4% withdrawal rate in his October 1994 paper published in the Journal of Financial Planning. He analyzed historical market data going back to 1926 and asked a simple question: what’s the highest amount a retiree could withdraw each year, adjusted for inflation, without running out of money over 30 years?
His answer: 4% of the initial portfolio value. Even someone who retired at the worst possible time—right before the Great Depression or the stagflation of the 1970s—would have survived 30 years at this rate.
The 1998 Trinity Study, conducted by three professors at Trinity University (Philip L. Cooley, Carl M. Hubbard, and Daniel T. Walz), reinforced these findings. Using data from 1926 to 1995, they found that a portfolio of 50% stocks and 50% bonds had a 95% success rate over 30-year periods when withdrawing 4% annually, adjusted for inflation.
These weren’t arbitrary numbers pulled from thin air. They represented the worst-case scenarios from nearly 70 years of American market history, including some of the most brutal economic periods on record.
Why early retirement changes everything
A 30-year retirement and a 50-year retirement are fundamentally different challenges. The original research wasn’t wrong—it just wasn’t answering your question.
Updated simulations using data through 2024 show that extending the timeline to 50 years drops the success rate of a 4% withdrawal to around 90% for stock-heavy portfolios. That might still sound acceptable until you consider what “failure” means: running out of money while you still have decades to live.
The longer your retirement, the more you’re exposed to sequence of returns risk. This is the danger that a market downturn in your first few years of retirement will permanently damage your portfolio’s ability to recover.
Here’s how it works. Imagine two retirees, each starting with $1 million and withdrawing $50,000 per year. One experiences a 15% market decline in years one and two, then steady 6% returns afterward. The other gets those 6% returns first and doesn’t see the decline until years 10 and 11.
Same average returns. Dramatically different outcomes. The early losses force you to sell more shares to meet your withdrawal needs, leaving fewer shares to participate in the eventual recovery. Research suggests that 77% of the final retirement outcome can be explained by the average return of the first 10 years of retirement.
For traditional retirees, this risk is manageable—a bad sequence might mean a tighter final decade. For early retirees, it could mean returning to work at 55 or radically downsizing your life at 60.
Risks of a 60/40 portfolio
The 4% rule historically assumed a balanced portfolio, typically 60% stocks and 40% bonds. This allocation has delivered around a 7% to 8% annual return over the long term, with lower volatility than an all-stock portfolio.
But think about what a 4% withdrawal rate plus 3% inflation means: you need roughly 7% annual returns just to maintain your purchasing power. A 60/40 portfolio gets you there, but barely. There’s not much margin for error.
For a 30-year retirement, “barely” might be enough. Most historical scenarios worked out. For a 50-year retirement, you’re betting that “barely” will hold for two additional decades across economic conditions we can’t predict.
This doesn’t mean the 4% rule is broken. It means early retirees might want to think differently about building a margin of safety.
Building your margin of safety
If the standard approach gets you close to the line, the question becomes: how do you create breathing room?
One approach is targeting higher expected returns through a more growth-focused portfolio allocation. An 80/20 or even 90/10 stock-to-bond ratio historically has produced higher long-term returns than the 60/40 split. Yes, this means more volatility. But for a 50-year time horizon, you have decades for the market’s short-term swings to average out.
Some investors take this further by including an actively managed portfolio segment focused on individual stocks with strong growth potential. This approach requires more expertise and attention than index investing, but it offers the possibility of returns that exceed broad market performance.
Another strategy is flexibility. The 4% rule assumes rigid withdrawals regardless of market conditions—the same dollar amount (adjusted for inflation) whether the market is up 30% or down 30%. But early retirees often have more options:
- You can cut discretionary spending during market downturns. A year or two of reduced travel and dining out is far better than depleting your portfolio during a recovery.
- You might maintain the ability to generate some income. Whether through consulting, part-time work, or a small business, having skills you can monetize provides a safety valve that pure retirees don’t have. Many in the FIRE community find that complete idleness isn’t as appealing as they imagined anyway.
- You can build a cash buffer covering one to two years of expenses. This allows you to avoid selling stocks during market declines, giving your portfolio time to recover before you need to tap it.
What this means for your plan
The 4% rule remains a useful starting point. It’s grounded in real data, it accounts for inflation, and it’s survived rigorous scrutiny for three decades. Dismissing it entirely would be a mistake.
But treating it as a guarantee would also be a mistake. Early retirement demands more: more savings, more flexibility, or a more aggressive investment approach. Often some combination of all three.
The specific formula matters less than the underlying discipline. Understanding sequence of returns risk, maintaining flexibility in your spending, managing taxes efficiently, and building a portfolio designed for the long haul—these are the elements that separate successful early retirements from cautionary tales.
The FIRE community’s focus on the 4% rule has done something valuable: it’s made early retirement feel achievable rather than fantastical. But the journey from “achievable” to “achieved” requires moving beyond rules of thumb to a plan built for your specific timeline and circumstances.
Start your planning
If you’re pursuing FIRE or already living it, understanding how these principles apply to your situation is essential. What works for a 65-year-old retiree with a pension and Social Security won’t necessarily work for a 45-year-old living entirely off investments.
We specialize in working with early retirees and those on the path to financial independence. Start here to see if we might be a good fit—it’s just four quick questions.
