You’ve saved for decades. Now the question flips: how much can you actually spend each year without running out of money? The “4% rule” is the most well-known answer, and it’s a good starting point — but it’s not a one-size-fits-all formula. Here’s how it works, a real dollar example, and what to do if your situation doesn’t fit the standard version.
What Is the 4% Rule?
The 4% rule comes from research by financial planner William Bengen in the 1990s. He studied historical market returns to find a withdrawal rate that a retiree could sustain over a 30-year retirement without depleting their portfolio, even through market downturns.
The basic formula is simple: withdraw 4% of your total portfolio value in your first year of retirement. In every following year, adjust that dollar amount for inflation — you don’t recalculate 4% of your new balance each year, you just keep increasing the original dollar amount to keep pace with rising prices.
A Real Dollar Example
| Year | Calculation | Annual Withdrawal | Monthly Amount |
|---|---|---|---|
| Year 1 | $1,000,000 portfolio x 4% | $40,000 | ~$3,333 |
| Year 2 | $40,000 + 3% inflation adjustment | $41,200 | ~$3,433 |
| Year 3 | $41,200 + 3% inflation adjustment | $42,436 | ~$3,536 |
Notice that Year 2 and Year 3 withdrawals are based on adjusting the previous year’s dollar amount for inflation — not recalculating 4% of the current (possibly lower or higher) portfolio balance. This is what makes the 4% rule a “set it and adjust for inflation” approach rather than a moving target.
In practice, most retirees don’t live on portfolio withdrawals alone. If this $40,000-$42,000 a year is combined with $24,000 a year in Social Security (or CPP/OAS for Canadian retirees), that’s a household budget in the mid-$60,000s to work with before taxes.
Does the 4% Rule Still Work in 2026?
According to research from Morningstar, referenced by AARP, a retiree using a balanced portfolio (roughly 40% stocks / 60% bonds) and a 4% starting withdrawal rate has historically had close to a 90% success rate over a 30-year retirement horizon — meaning the portfolio lasted the full 30 years in the large majority of historical and simulated scenarios.
That said, this isn’t settled science. Some financial planners argue that today’s starting valuations and longer life expectancies call for a more conservative starting rate, somewhere in the 3.7% to 3.9% range, while others favor flexible, performance-based withdrawal strategies over a fixed percentage. Treat the 4% figure as a well-researched starting point for a conversation, not a guarantee.
When the 4% Rule Might Not Fit Your Situation
- Retiring earlier than 65. A longer retirement horizon (35-40+ years instead of 30) generally calls for a lower starting withdrawal rate.
- Very conservative or very aggressive portfolios. The 4% rule was modeled on a balanced stock/bond mix — an all-cash portfolio or an all-stock portfolio behaves very differently.
- Large fixed pension or annuity income. If a pension already covers most of your essential expenses, your portfolio withdrawals may need to cover only discretionary spending, changing the math.
- Rising health or long-term care costs. Spending often isn’t flat throughout retirement — it can spike significantly in later years due to health needs.
Alternative & Flexible Withdrawal Strategies
Guardrails Approach
Instead of a fixed inflation-adjusted amount, you set upper and lower “guardrails” for your withdrawal rate. If your portfolio performs well and your withdrawal rate drops below the lower guardrail, you can increase spending. If a downturn pushes your withdrawal rate above the upper guardrail, you cut back temporarily.
Bucket Strategy
This approach splits your savings into three “buckets”: a short-term cash bucket (1-2 years of expenses) to ride out market downturns without selling investments at a loss, a mid-term bond bucket, and a long-term growth (stock) bucket for money you won’t need for a decade or more.
Spending-Pattern Approach
This strategy assumes spending isn’t flat across retirement. It plans for higher spending in the early “go-go years” (travel, hobbies), lower spending in the middle “slow-go years,” and higher spending again later in retirement for healthcare and long-term care needs.
How to Apply This to Your Own Retirement Budget
A simple 3-step exercise to see where you stand:
- Total your portfolio. Add up all retirement accounts — 401(k), IRA, RRSP, brokerage accounts.
- Calculate 4% of that total. This is your rough first-year withdrawal estimate.
- Compare it to your actual monthly needs after subtracting guaranteed income like Social Security, CPP, OAS, or a pension.
From there, pairing this withdrawal estimate with a monthly budgeting framework, such as the 50/30/20 rule (50% needs, 30% wants, 20% savings or debt repayment), can help you allocate the money once you know roughly how much you have to work with.
If your numbers are close to the edge, or your situation includes major variables like early retirement, a pension, or expected long-term care needs, it’s worth sitting down with a fee-only financial planner rather than relying on a rule of thumb alone.
FAQ
Is the 4% rule the same for Canadians using RRSPs/RRIFs?
The underlying math is the same, but Canadian retirees also need to factor in RRIF minimum withdrawal requirements, which are mandated by age and can sometimes force withdrawals above 4%. CPP and OAS timing decisions also affect how much you need to draw from your RRSP/RRIF.
What happens if the market drops right after I retire?
This is known as “sequence of returns risk,” and it’s one of the biggest threats to a fixed 4% withdrawal plan. A downturn in your first few retirement years, combined with continued withdrawals, can do more damage than the same downturn later in retirement. This is exactly why flexible strategies like the guardrails approach exist.
Should I recalculate the 4% every year or just adjust for inflation?
The classic version of the rule only adjusts your original dollar amount for inflation each year — it does not recalculate 4% of your current balance. Recalculating annually is a different, more flexible strategy that can reduce the risk of running out of money but also means your income varies more year to year.