4 Retirement Rule Calculator

by
Reviewed by: David Chen, CFA

Use our 4% Retirement Rule Calculator to estimate the portfolio size you need to achieve financial independence, or to determine your safe withdrawal rate based on your current savings.

4% Retirement Rule Calculator

4% Retirement Rule Formula

$$\text{Required Portfolio Value} = \frac{\text{Annual Withdrawal}}{\text{Safe Withdrawal Rate}}$$ $$P = \frac{W}{R/100}$$

Formula Source: Investopedia: 4% Rule, Fidelity: Is the 4% Rule Safe?

Variables

  • Required Portfolio Value (P): The lump-sum amount needed in your retirement account.
  • Desired Annual Withdrawal (W): The amount you plan to withdraw in your first year of retirement, which is typically inflation-adjusted thereafter.
  • Safe Withdrawal Rate (R): The percentage of your initial portfolio value you withdraw. The rule sets this at 4%.
  • Expected Average Inflation Rate (I): Used for context, as the 4% rule inherently accounts for inflation over a 30-year period.

Related Calculators

What is the 4% Retirement Rule?

The 4% rule is a widely cited rule of thumb for retirement planning. It suggests that retirees can safely withdraw 4% of their total savings in the first year of retirement, and then adjust that dollar amount for inflation every subsequent year, for a 30-year retirement horizon. The rule originated from the 1998 Trinity Study, which analyzed historical market data to determine a “safe” withdrawal rate that minimizes the risk of running out of money.

While the 4% rule provides a helpful starting point, it is not a guarantee. Critics point out that current market conditions (low interest rates, high valuations) and increasing longevity may reduce the true safe withdrawal rate to 3.5% or less. It is essential to use it as an estimate and adjust based on personal risk tolerance and financial goals.

How to Calculate the 4% Rule (Example)

Suppose you want an annual income of $50,000 in your first year of retirement.

  1. Determine Desired Withdrawal (W): $50,000.
  2. Set Safe Withdrawal Rate (R): Use the default 4% (0.04).
  3. Apply the Formula: $P = W / R$.
  4. Calculate Portfolio Value: $P = \$50,000 / 0.04 = \$1,250,000$.
  5. Conclusion: You would need a portfolio of $1,250,000 to safely withdraw $50,000 annually.

Frequently Asked Questions (FAQ)

Is the 4% Rule still safe in 2024?

Many financial experts suggest a slightly lower rate (3.5% to 3.8%) due to lower expected future investment returns and higher market volatility. However, 4% remains a useful benchmark for planning.

What is the typical inflation rate used in retirement planning?

Historically, a long-term inflation rate of 3% is often used, but current rates can be higher or lower. The 4% rule is designed to work even with a historical average inflation rate factored in.

Does the 4% rule include Social Security?

No. The 4% rule is only applied to the assets you withdraw from (like 401k, IRA, brokerage accounts). You should calculate your Annual Withdrawal (W) as the total desired income minus any guaranteed income sources like Social Security or pensions.

What is the risk of using a higher withdrawal rate, like 5%?

A 5% withdrawal rate significantly increases the chance of depleting your portfolio within a 30-year retirement period. The Trinity Study suggested a much higher failure rate for a 5% rate compared to 4%.

V}

Leave a Comment