4% rule: an amount set once, then indexed
Say a capital of €720,000. In the first year, 4% gives €28,800, or €2,400 a month. If prices rise by 2% that year, the second withdrawal goes up to €29,376, whether the stock market rose or fell.
So the percentage is used only once. After that, the withdrawal follows prices, not the value of the portfolio. If the portfolio drops to €576,000 after a bad year, the €29,376 comes to 5.1% of it.
This is the definition given by William P. Bengen in "Determining Withdrawal Rates Using Historical Data", Journal of Financial Planning, October 1994 (2004 FPA reprint). After the first year, he writes, the withdrawal rate "is no longer used for computing the amount withdrawn". The amount is last year's withdrawal plus inflation. The withdrawal rate means that starting percentage and nothing else.
Read backwards, the rule gives a target capital: annual spending divided by the rate. At 4%, that is 25 times what you spend in a year.
| Withdrawal rate | Multiple of annual spending | Capital for €28,800 a year (€2,400 a month) |
|---|---|---|
| 3% | 33.3 times | €960,000 |
| 3.5% | 28.6 times | €822,857 |
| 4% | 25 times | €720,000 |
| 5% | 20 times | €576,000 |
The table is a plain division, before fees and before tax. Going from 4% to 3% already takes a third more capital.
The 4% rule sets a euro amount in the first year, and from then on that amount, indexed to prices, is what comes out each year.
Safe withdrawal rate: what Bengen measured in 1994
In his 1994 Journal of Financial Planning article, Bengen opens with a planner's mistake: working out withdrawals from average returns, when a crash on top of high inflation is enough to undo the sum. So he goes back through history year by year, using US data since 1926.
A first retiree starts on 1 January 1926, a second in 1927, and so on. Each holds 50% US stocks and 50% intermediate-term Treasuries, rebalanced continually. Bengen counts how many years each portfolio lasts and stops his charts at 50 years.
| Initial withdrawal rate | What Bengen's data show (50% stocks, 50% bonds) |
|---|---|
| 3% | Every retiree lasts at least 50 years, whatever the starting year |
| About 3.5% | Same result, never under 50 years |
| 4% | No portfolio runs dry before 33 years, most last 50 years or more |
| 4.25% | A portfolio can run out in 28 years |
| 5% | Retirements starting in the late 1960s and early 1970s sometimes get only 20 years |
| 6% | Over 30 years, 31 starting years exhaust the capital and only 20 are enough |
Bengen calls 3% "absolutely safe", with a caveat in brackets: "to the extent history is a guide". For a minimum of 30 years, he settles on 4%. He calls 5% "risky", and 6% or more is, in his word, "gambling". That is where the safe withdrawal rate comes from: the highest rate that held up in the worst historical case, over a given period.
On allocation, he settles on a range of 50% to 75% stocks at the start of retirement, and calls going below 50% counterproductive.
The study by Cooley, Hubbard and Walz, AAII Journal, February 1998, known as the "Trinity study", measures the share of periods in which the portfolio ends above zero. It covers rates from 3% to 12% and periods of 15 to 30 years, on US data from 1926 to 1995. Its authors conclude that "early retirees who anticipate long payout periods should plan on lower withdrawal rates."
For Bengen, "safe" means a rate that held up in the worst US case since 1926, over a given period.
Withdrawal rate: 3%, 4% or 5%, the target capital and the date
The example plan: €60,000 already invested, €1,200 paid in each month and indexed, and €2,400 net a month wanted in today's euros. The 6% annual return is an assumption made for the example. The 2% inflation is the medium-term target in the ECB's monetary policy strategy (page in French, also published in English), which is a target and not a forecast. Fees are 0.25% a year, and withdrawals are not taxed, as in the Luxembourg preset.
The figures come from the financial independence calculator, preset to 3.5%. It takes fees off twice: from the return while you save, then from the withdrawal rate in retirement. At 4%, the rate actually available therefore drops to 3.75%.
| Withdrawal rate | Rate after fees | Target capital (today's euros) | Multiple of spending | Time to reach it |
|---|---|---|---|---|
| 3% | 2.75% | €1,047,273 | 36.4 | 31 years 10 months |
| 3.5% | 3.25% | €886,154 | 30.8 | 28 years 7 months |
| 4% | 3.75% | €768,000 | 26.7 | 25 years 11 months |
| 4.5% | 4.25% | €677,647 | 23.5 | 23 years 8 months |
| 5% | 4.75% | €606,316 | 21.1 | 21 years 10 months |
There are two ways to read the table. First, a quarter point of fees takes the target capital at 4% from €720,000 to €768,000, and the multiple from 25 to 26.7.
Second, the gap is lopsided. Going down from 4% to 3% adds €279,273 to the target capital and 5 years 11 months to the wait. Going up from 4% to 5% takes €161,684 off and brings the date forward by 4 years 1 month. Because the rate divides the spending, each half point weighs more when the rate is low.
The table puts a cost on each rate without saying which one will hold. It is an estimate for teaching purposes.
The lower the withdrawal rate goes, the more each further half point down costs in capital and in years.
Cross-border workers and expats: dollars, duration and tax
Three assumptions in the original studies do not fit a cross-border worker paid in Luxembourg.
Currency, first. Both studies cover US securities, in dollars, with US inflation. A saver in euros has other data series, and neither text carries the figure over to that saver's portfolio.
Duration, next. In the conclusion of his 1994 article, Bengen aims for the client's life expectancy plus 5 to 10 years, which usually gives about 4% for someone retiring at 60 or 65. Stopping work at 45 can mean 45 years of withdrawals. In his data, only 3% and about 3.5% lasted 50 years from every starting year.
Tax, last. Bengen assumes the capital sits in tax-deferred accounts. In practice, the tax due on a withdrawal comes on top of the amount taken out. At 4%, with 0.25% fees and €2,400 net a month for one adult, the four country presets of the same tool give the following.
| Preset | Tax on withdrawals | Annual allowance per adult | Gross monthly withdrawal | Target capital (today's euros) |
|---|---|---|---|---|
| Luxembourg | 0% | not applicable | €2,400 | €768,000 |
| Belgium | 10% | €10,000 | €2,574 | €823,704 |
| Germany | 26.375% | €1,000 | €3,230 | €1,033,571 |
| France | 31.4% | none | €3,499 | €1,119,534 |
The rates come from each country's own texts. In Luxembourg, capital gains on securities held for more than six months are exempt for a shareholding of 10% or less (page in French). Since 1 January 2026, Belgium has applied a 10% tax, with the first €10,000 bracket exempt for tax year 2027. Germany levies 25% (§ 32d EStG), plus 5.5% of that tax as Solidaritätszuschlag (§ 4 SolZG), after a Sparer-Pauschbetrag of €1,000 (§ 20 EStG). France applies a flat tax (PFU) of 31.4% since 1 January 2026.
The calculation errs on the cautious side. It treats every euro withdrawn as a taxable gain, although part of each withdrawal is capital you paid in. Each row describes a resident of that country holding an ordinary securities account.
At the same withdrawal rate, tax on withdrawals can take the target capital from €768,000 to €1,119,534.
What the four percent rule does not show
The order of returns matters more than their average. A retiree hit by a crash in the very first year sells at the bottom to fund withdrawals, and the units sold miss the recovery.
Bengen's 1994 article shows this with the "Big Bang" of 1973-1974, a fall in stocks in the middle of high inflation. Its effects reach back to retirements that began 20 years earlier, sometimes more. His 1929 retiree starts with $500,000 and withdraws 4%. By the end of 1932, he has less than $200,000 left, and his withdrawal, brought down to $15,300 by deflation, comes to about 7.6% of it.
The rule sets a withdrawal and promises nothing about returns. At 4%, in most of Bengen's starting years, the capital lasts 50 years or more. In the worst ones, it runs out in a little over thirty years.
The 1994 figure is also a gross one. The article says nothing about fees and assumes deferred tax, two costs that the tables above put a number on.
Two retirees with the same average return can end up one with capital left and the other with nothing, depending on the order of their first few years.
Frequently asked questions
How do you work out your capital with the 4% rule?
The target capital is annual spending divided by 4%, which is 25 times that spending. For €2,000 a month, so €24,000 a year, that gives €600,000. With 0.25% of fees taken off the rate, 4% becomes 3.75% and the capital rises to €640,000, before tax on withdrawals.
What is the safe withdrawal rate?
It is the highest initial withdrawal rate that, in the historical data, never emptied the portfolio before a given period. For Bengen, in 1994, that was 4% for at least 30 years, with half US stocks and half US bonds. "Safe" refers to the history of US markets since 1926, not to a guarantee.
Does the 4% rule work for early retirement?
The original studies reason over 30 years. The Trinity study stops at 30 and concludes that early retirees should plan on lower rates. In Bengen's data, only 3% and about 3.5% lasted 50 years whatever the starting year.
Does the four percent rule apply to a portfolio in euros?
Both studies use US stocks and bonds, in dollars, with US inflation, since 1926. Neither tests a portfolio in euros, and nothing in these texts says the figure carries over unchanged to other markets.
Key points
- The 4% rule sets the first withdrawal at 4% of capital, then indexes that amount to inflation each year, whatever the value of the portfolio.
- Read backwards, it gives a target capital of 25 times annual spending, against 33.3 times at 3% and 20 times at 5%, before fees and tax.
- William Bengen drew the figure in 1994 from US data since 1926: at 4%, with half stocks and half bonds, no portfolio ran dry in less than 33 years.
- In this guide's worked example, going from 4% to 3% takes the target capital from €768,000 to €1,047,273 and the time to reach it from 25 years 11 months to 31 years 10 months.
- Fees come off the withdrawal rate and tax is added to the amount withdrawn, two costs the 1994 article did not count.