Glossary · Investing and personal finance
Safe withdrawal rate
A safe withdrawal rate is how much of your savings you can spend each year, raised with inflation, without running out. The best-known is the 4% rule.
Also called: 4% rule, four percent rule, sustainable withdrawal rate, SWR
For a retirement starting in 1966: 30 years, 60/40 US stocks and bonds, withdrawals raised with inflation.
126 start years, 1871 to 1996.
Same portfolio, before taxes and fees.
In plain words
You have saved $1,000,000 and stop working. How much can you spend each year without the money running out before you do? Take too much and you go broke at 80; take too little and you live poorer than you needed to. The safe withdrawal rate is the answer researchers get from history.
The famous version is the 4% rule, from a 1994 study by the financial planner William Bengen: take 4% of the starting balance in the first year ($40,000 on $1,000,000), then raise that amount with inflation every year. In the US data he studied, a portfolio of about half stocks and half bonds lasted at least 30 years from every starting year with that plan.
We ran the same test on our data with 60% US stocks and 40% 10-year Treasuries. The highest rate that lasted 30 years ranged from 3.7% for a retirement starting in 1966 to 11.0% for one starting in 1982.
Example
The 4% rule on $1,000,000
- Year 1: withdraw 4% of $1,000,000 = $40,000.
- Prices rise 3%, so in year 2 you withdraw $40,000 × 1.03 = $41,200, whatever the markets did.
- Year 3: $41,200 × 1.03 = $42,436, and so on for 30 years.
- The rest stays invested; the plan fails if the money runs out before year 30.
The rule fixes only the first year’s amount as a share of savings. After that, the amount follows inflation, not the balance.
One level deeper
The worst times to retire were not just before the famous crashes, but before long stretches of poor returns after inflation, when high inflation ate into both stocks and bonds. In our test the three worst start years were 1966, 1965, 1968.
The rule is a historical worst case, not a promise. It comes from US data, the best-performing big market of the 20th century, and studies of other countries find lower safe rates. It ignores fees and taxes and assumes spending never adapts. Longer retirements need lower rates; flexible rules, such as spending less after bad years, allow higher ones.
In most start years 4% was very cautious: the median safe rate in our test was 6.3%, and many retirees following the rule would have ended with more than they started with. Only hindsight tells which kind of start you got.
The safe withdrawal rate for every retirement year since 1871
Each bar is a retirement starting in that January: the highest first-year withdrawal, as a share of savings and raised with inflation afterwards, that a 60/40 portfolio could pay for 30 years. The lowest was 3.7% for 1966; the dashed line marks the 4% rule.
The numbers behind the chart
| Date | Safe withdrawal rate |
|---|---|
| 1871 | 8.9% |
| 1880 | 7.7% |
| 1890 | 6.0% |
| 1900 | 5.4% |
| 1910 | 4.7% |
| 1920 | 9.1% |
| 1930 | 5.2% |
| 1940 | 5.3% |
| 1950 | 7.9% |
| 1960 | 4.8% |
| 1970 | 4.7% |
| 1980 | 8.7% |
| 1990 | 7.8% |
| 1992 | 7.5% |
| 1993 | 7.6% |
| 1994 | 7.4% |
| 1995 | 8.2% |
| 1996 | 6.9% |
Why it matters
It turns a savings total into an income: $1,000,000 at 4% is $40,000 a year. Turned around, a $40,000 income needs about 25 times that in savings.
It shows why the first years of retirement matter most: a crash or high inflation early on does far more damage than the same one later (sequence risk).
It is a starting point for planning, not a law: real plans adjust for fees, taxes, pensions, Social Security and flexible spending.
A common mistake
Myth: The 4% rule means spending 4% of whatever your savings are worth each year.
In fact: The original rule takes 4% of the starting balance, then raises that dollar amount with inflation, whatever markets do. Taking 4% of the current balance is a different plan: it never runs out, but the income falls with the market.
Questions people ask
Is the 4% rule still safe?
It held in most of US history: in our test it lasted 30 years in 97% of start years. But the worst start, 1966, could pay only 3.7%, and future returns may be lower than past ones. Many planners treat 4% as a starting point to adjust, not a guarantee.
How much do you need to retire with the 4% rule?
Divide the yearly income you need from savings by 0.04, which is the same as multiplying by 25: $40,000 a year needs $1,000,000, and $60,000 needs $1,500,000. Pensions and Social Security reduce what savings must cover.
What is sequence-of-returns risk?
The danger of bad returns early in retirement, while you are withdrawing. A 30% fall in year one hurts much more than the same fall in year twenty, because you sell investments at low prices and that money is gone before the recovery.
Read more on BigCapital
About the numbers
- The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
- US 10-year Treasury bonds, total return index: Robert J. Shiller, Online Data (shillerdata.com), ie_data.xls, sheet "Data": "Long Interest Rate GS10", checked against "Monthly Total Bond Returns" and "Real Total Bond Returns".
- S&P Composite price and total return since 1871, and US consumer prices: Robert J. Shiller, Online Data (shillerdata.com); total return with dividends reinvested monthly, calculated by BigCapital.
- Our test uses 10-year Treasuries; Bengen’s 1994 study used intermediate-term Treasuries and a 50/50 mix, which is one reason the worst-case rates differ slightly.
- This page explains a term. It is not investment advice.