The Math Behind the 4% Rule

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title: "The Math Behind the 4% Rule" excerpt: "Understanding the Trinity Study and safe withdrawal rates for early retirement." date: "2024-11-15" category: "Strategy" author: "Jonathan" readTime: "8 min read"

The 4% rule is the cornerstone of FIRE planning. But where does this number come from, and can you really trust it with your financial future?

The Trinity Study

In 1998, three professors from Trinity University published a groundbreaking study analyzing historical stock and bond returns from 1926 to 1995. Their goal? Determine safe withdrawal rates for retirees.

Key Findings

The study found that:

• 4% withdrawal rate had a 95% success rate over 30-year periods
• A portfolio of 75% stocks / 25% bonds performed best
• Lower withdrawal rates (3-3.5%) had near 100% success rates
• Market timing at retirement matters significantly

The Math

Here's the simple calculation:

Annual Withdrawal = Portfolio Value × 0.04
FIRE Number = Annual Expenses × 25

If you need $40,000 per year in retirement:

• FIRE Number: $40,000 × 25 = $1,000,000
• Annual Withdrawal: $1,000,000 × 0.04 = $40,000

Why 4% Works

The 4% rule works because:

1. Historical market returns average 7-10% annually
2. Inflation averages 2-3% annually
3. Real returns (after inflation) are around 7%
4. 4% leaves a buffer for sequence of returns risk

Important Considerations

Sequence of Returns Risk

The order in which you experience returns matters. A market crash in year 1 of retirement is far more damaging than one in year 20.

Example:

• Portfolio A: -20%, +30%, +10% = Different outcome than
• Portfolio B: +10%, +30%, -20%

Even with identical average returns, Portfolio A suffers more due to early withdrawals during the crash.

The 4% Rule Critiques

Modern critics argue:

• Lower future returns: Current market valuations suggest lower future returns
• Longer retirements: Early retirees need portfolios to last 40-50+ years, not 30
• International diversification: The study used only US markets
• Current bond yields: Near-zero rates weren't in historical data

Adjustments for Early Retirement

For early retirees, consider:

1. 3.5% rule: More conservative for 40+ year retirements
2. Variable withdrawals: Spend less in down years, more in up years
3. Guard rails strategy: Set upper/lower bounds for spending
4. Flexible spending: Distinguish needs vs wants

Dynamic Withdrawal Strategies

The Vanguard Method

Adjust withdrawals based on portfolio performance:

• Portfolio up 20%? Increase spending by inflation + 1%
• Portfolio down 20%? Freeze spending or cut discretionary items

The Guardrails Approach

Set spending rules:

• Upper guardrail: If portfolio exceeds 30% above target, increase spending
• Lower guardrail: If portfolio drops 20% below target, cut spending

The FIRE Sweet Spot

For most FIRE seekers, the optimal approach combines:

• 3.5-4% base withdrawal rate
• Geographic arbitrage to reduce expenses
• Flexibility in spending during market downturns
• Part-time income in early years (Barista FIRE)
• Tax optimization to maximize withdrawal efficiency

Real Example

Meet Sarah, age 35, targeting FIRE:

• Annual expenses: $50,000
• FIRE number (4% rule): $1,250,000
• FIRE number (3.5% rule): $1,428,571
• Coast FIRE (to age 65): ~$250,000 now

Sarah decides to:

1. Save aggressively to hit $250k by age 40 (Coast FIRE)
2. Continue to $1.3M by age 45 (using 3.75% rate)
3. Build in flexibility with a side hustle
4. Use guard rails for spending adjustments

The Bottom Line

The 4% rule is a guideline, not a guarantee. Use it as a starting point, but build in:

• ✅ Flexibility in your spending
• ✅ Backup income sources
• ✅ Conservative estimates (3.5% for early retirement)
• ✅ Dynamic adjustments based on market performance
• ✅ Tax efficiency in withdrawals

Remember: The 4% rule has worked historically, but your mileage may vary. Plan conservatively, spend flexibly, and keep your options open.

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My Take: Why I'm Sticking with 4% (For Now)

When I first discovered the 4% rule in 2025, I'll be honest—I was excited. You're telling me I can calculate exactly how much I need to retire early, and it's based on decades of historical data? Sign me up.

But the more I researched, the more I realized it's not quite that simple. I'm 40 years old, which means if I retire at 50-55, I need my money to last 40-50 years, not the 30 years the Trinity Study was based on. That's a problem.

Here's where I landed: I'm planning to use the 4% rule, but with a conservative approach. My goal is to keep the portfolio growing even in retirement. I'm not trying to spend it down to zero by age 90—I want it to keep compounding so I have a buffer for healthcare costs, market crashes, or just living longer than expected.

What surprised me most was learning about sequence of returns risk. I always thought average returns were what mattered, but the order of those returns when you're withdrawing money? That's a game-changer. A market crash in year 1 of retirement can wreck your plan, even if the market recovers later.

I'm still figuring out my exact FIRE number (I'll probably need a bigger target than the basic 25x calculation), but I know this: I'd rather work an extra year or two and have a solid margin of safety than retire at the edge and stress about every market dip.

Use our calculator to run your numbers, but remember—this is a starting point, not a finish line. And talk to a financial advisor. I'm just a roofing business owner who's learning this alongside you.

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