The 4% Rule: How to Use It in a FIRE Plan

Almost every FIRE plan stands on one number, and that number came from a 1994 journal article. William Bengen, a financial planner with an MIT engineering degree, tested how much retirees could have withdrawn from a balanced portfolio in every historical period since 1926 without running out of money in 30 years. The worst case landed at about 4% a year. Three decades later, that single finding still decides how big a "done saving" portfolio needs to be, so it is worth understanding what the rule actually says, what it assumes, and where it bends.

You will see it written several ways: the 4% rule, the four percent rule, the 4 rule, or the 25x rule. They all describe the same arithmetic, and the last one is simply the first one turned upside down.

What does the 4% rule actually say?

The mechanics are more specific than the nickname suggests. In your first year of retirement, you withdraw 4% of the portfolio's starting value. Every year after, you withdraw the same dollar amount adjusted for inflation, regardless of how markets performed. Retire with $1,000,000 and you take $40,000 in year one; if inflation runs 3%, you take $41,200 the next year, whether the portfolio grew or fell.

Notice what the rule is not: it is not "withdraw 4% of whatever the balance is each year." That variant can never empty the account, but the income swings with every market move. Bengen's version trades that volatility for a fixed, inflation-adjusted paycheck, and accepts a small historical risk of depletion in exchange.

Why is a FIRE number 25 times annual spending?

Divide instead of multiply and the shortcut appears: if year-one spending is 4% of the portfolio, the portfolio is spending ÷ 0.04, which is spending × 25. The multiple is nothing more than the withdrawal rate flipped over, which means every withdrawal rate implies its own multiple, and its own FIRE number.

Maya, the worked example we use across this series, spends $40,000 a year. Here is her target at different starting rates:

Half a percentage point moves the target by six figures. That is the real reason to understand this rule rather than just quote it: the rate you choose is the single most expensive assumption in your plan. An honest spending number matters just as much, which is where a real budget earns its keep.

Where does the rule come from?

Bengen published Determining Withdrawal Rates Using Historical Data in the Journal of Financial Planning in 1994. Instead of using average returns, he replayed history: a retiree starting in 1926, another in 1927, and so on, each holding 50-75% stocks and withdrawing an inflation-adjusted amount for 30 years. A 4% starting rate survived every start date, including retirements that began just before the Great Depression and the brutal 1970s inflation. The 1998 Trinity study reached a similar conclusion with a different method, and the two together made 4% the community standard.

The research keeps evolving. Morningstar's retirement-income research re-estimates the safe starting rate annually from forward-looking return projections instead of pure history. Its 2025 State of Retirement Income report put the number at 3.9% for a 30-year horizon, up from 3.7% the year before, and found that flexible strategies, like trimming spending after down years, can support meaningfully higher starting rates. The lesson is not that 4% is wrong; it is that the "safe" rate is a moving estimate built on assumptions about horizon, allocation, inflation, and flexibility.

What assumptions is the rule built on?

Every guideline encodes its test conditions. Bengen's number assumed a roughly 30-year retirement, a 50-75% stock allocation, annual inflation-adjusted withdrawals taken like clockwork, U.S. historical returns, and no investment fees or taxes. Change any of these and the safe rate changes with them.

The horizon assumption matters most for FIRE. Someone retiring at 40 may need the portfolio for 50 years, not 30, and a longer horizon gives bad luck more chances to compound. That is why many early retirees plan around 3.25% to 3.5% instead, or treat 4% as the optimistic end of a range rather than the default.

What is sequence-of-returns risk?

Averages hide order, and in retirement, order is everything. Imagine two retirees with identical portfolios and identical 30-year average returns. One hits a deep bear market in years one and two; the other hits the same bear market in years twenty-nine and thirty. The first retiree sells shares at depressed prices to fund withdrawals early, and the portfolio may never recover even when markets do. The second barely notices.

This is sequence-of-returns risk, and it is the specific failure mode the 4% rule's worst-case history captures. It is also why flexibility is worth so much: retirees who can cut spending 10-20% after a bad year, delay retirement by one year in a downturn, or hold a cash buffer to avoid selling low are defending against sequence risk directly. Morningstar's finding that flexible strategies support higher starting rates is the same insight measured formally.

How should you choose your own withdrawal rate?

Treat the rate as a dial to test, not a truth to adopt. A reasonable process looks like this:

1. Start from your honest annual spending. Every multiple of a wrong number is a wrong target.
2. Model several rates. Run 3%, 3.5%, 4%, and 5% through the FIRE Path Explorer and watch how the FIRE number and the timeline move. The gap between the 3% and 5% plans is the price of margin, made visible.
3. Match the rate to your horizon and flexibility. Longer retirement, lower rate. Rigid spending, lower rate. Willing and able to flex? You can justify more.
4. Get guidance for the real decision. A blog and a calculator can frame the tradeoff; the final rate for an actual retirement deserves professional advice built on your full picture.

Compare withdrawal-rate scenarios

The 4% rule earned its place: it turned an impossible question, "how much is enough?", into arithmetic anyone can do. Just remember it is the start of the estimate, not the end. Test your own numbers at several rates in the FIRE Path Explorer, then see the rest of the series: what the target means in our beginner's guide to FIRE, how Coast FIRE lets compounding finish the plan, and what role passive income plays once withdrawals begin. Watching your real portfolio close the gap is the motivating part, and net worth tracking makes the gap visible.

Educational content, not personal financial advice. Withdrawal-rate research depends on assumptions about horizon, allocation, inflation, and spending flexibility; no rate guarantees an outcome.