Safe Withdrawal Rate (4% Rule)
A safe withdrawal rate is the percentage of a retirement portfolio you can withdraw in the first year, then adjust for inflation, with low risk of running out. The well-known 4 percent rule comes from the Trinity study of historical returns.
The idea behind a safe withdrawal rate is to turn a portfolio into a sustainable paycheck. You withdraw a set percentage of the starting balance in year one, then increase that dollar amount by inflation each year regardless of how the markets move. The question the research asks is how high that starting percentage can be before historical sequences of returns would have exhausted the money too soon.
The 4 percent figure comes from the Trinity study and related work, which tested withdrawal rates against historical U.S. stock and bond returns over 30-year retirements. It is a planning guideline, not a guarantee: results depend on your time horizon, asset mix, fees, and the order in which good and bad return years arrive. Treat 4 percent as a starting reference and adjust up or down for your own time horizon and risk tolerance.
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Related terms: Compound Interest
Source: U.S. Securities and Exchange Commission, Investor.gov saving and investing basics
Last updated . Part of the FinExplained finance glossary .