The 4% Rule – how to know when to retire

How do you actually know when you can retire? Is it when you hit £500k… £1million… or some other arbitrary number that just “feels” right? The truth is, most people have no clear answer – which is why so many either delay retirement unnecessarily or worry they’ll run out of money.

Fortunately, there is a far more logical way to approach this. Enter the concept of the 4% Rule of Retirement – a simple, research-backed framework that helps you calculate exactly how much you need based on your spending, not guesswork.

Instead of chasing a random number, you can build a clear, evidence-based target. In this post, we’ll break down how it works, what the research says, and how you can use it to confidently plan your own retirement timeline.

Some assumptions first

However, before we get onto explaining things, there are some assumptions we need to make:

• Your money is invested in low-cost index funds tracking broad stock markets like the US or global stock market. I use Vanguard’s FTSE All-World UCITS ETF (VWRP/ VWRL).
• Your money is primarily invested in equities, not bonds (which are safer but give lower returns).
• Your money is invested with Vanguard. They have some of the lowest investment fees around, and operate in a way that returns value to you, the investor, rather than external shareholders. Other investment providers will charge you a fee (potentially up to 1%) of your portfolio every year. This has a strong drag on your wealth building potential over the long-term.

The Trinity Study

Back in February 1998, three professors at Trinity University, Texas, published an influential paper analysing retirement savings and the “safe withdrawal rate” based on the past 70 years of US market data (1926-1995). In other words, how much money can you take every year from your investments, as a proportion of the total, and have enough to sustain your retirement?

It became known as the Trinity Study in the world of personal finance, and has become the bedrock of withdrawal rates during retirement ever since. (The original paper can be found here.)

To give a bit of background here, the authors back-tested US market returns from 1926 to 1995, and they tested multiple different portfolios, from 100% stocks to 100% bonds. Scenarios spanned up to 30 years, with “success” defined as the portfolio still having a positive value at the end of the period. Withdrawals were adjusted for inflation each year, so retirees maintained their real purchasing power.

Trinity Study Results

• A withdrawal rate of 4% (adjusted for inflation) would sustain a portfolio with a 95%+ probability over a 30-year period. This was slightly higher for a 75% stocks/25% bonds portfolio (98%), but slightly lower for 100% stocks and 50/50 bonds/stocks (95%).
• A lower withdrawal rate of 3% has a 100% probability of success after 30 years for all three of the above portfolios.
• Higher rates fail more often. As withdrawal rates increase above 5%, the probability of running out of money after 30 years increases sharply.
• For shorter retirements (15-20 years), higher withdrawal rates above 5% succeeded more often.
• For a typical 30-year retirement, a 4% withdrawal rate was the highest amount that could be safely taken for portfolios with at least 50% stocks. This has led to the popular “4% Rule”, often associated with retirement withdrawal rates today.

The 4% Rule is the simple answer to how much you need to retire. If 4% of your portfolio is equivalent to your annual expenses (and this assumes that, apart from inflation, your annual expenses will not increase during retirement), then your entire portfolio must be worth 25x your annual expenses (since 4 x 25=100).

In the study, the long-term market gain was 7% per year (I like to be more optimistic than this, and typically go for 9%, which is closer to historical returns since 1995). Historically, inflation eats 3% of this each year, so you have 4% which you can safely withdraw in the knowledge that, on average, your portfolio will continue to increase in value and cover the rising cost of living due to inflation.

The Trinity Study is old

This is true. We now have thirty more years of market data to play with from what the Trinity Study used. Does this change things? Well, not really. There’s some fantastic research online that investigates an updated Safe Withdrawal Rate based on more recent market data. I think thePoorSwiss does an exceptional job at updating the Trinity Study results to include more recent years (up to the end of 2024). We will focus on their work below:

An updated Trinity Study (by thePoorSwiss)

With the updated data, anything above 6% is very risky, with less than a 75% chance to succeed, even with 100% stocks. Withdrawal rates between 3 and 4% are very safe (over a 95% chance of success).

What about a longer retirement?

Okay, so you’re following the Slow Down and Save lifestyle, have accumulated a ton of money, and are considering having an even longer retirement. How about 50 years?

Success rates tend to decrease the longer you stay retired. A 100% allocation to stocks and a 3.5% withdrawal rate leads to a 98% success rate. Anything lower than 3% gives a 100% success rate. Assuming 100% stocks, anything above 5% has a less than 70% chance of success.

This research strongly suggests that the Trinity Study results still hold true even when doubling the market period analysed, as has been done here.

How long to failure in the worst possible market conditions?

Another important measure of success (and failure) of your portfolio, is the worst duration of a scenario. This means how long it takes for the first complete failure of your portfolio to happen, based on historical market conditions.

The differences between this graph and the one above are stark. Looking at the first 50-year graph, you’d assume having 100% stocks is the best. However, looking at the second graph, 100% stocks is the worst(!) This illustrates that when drawing down your portfolio in retirement, you need it to be balanced (with bonds) to reduce the risk of your portfolio failing if the worst market conditions should arise. This is especially impactful early on in retirement and is called Sequence of Returns risk.

Any relevance for investing in the global stock market?

You may have noticed that all the research we’ve looked at so far has focussed on bonds and stocks in the US stock market. As a UK-based investor, I like to invest in global index funds, not just putting all my eggs in the US economy. It’s important to note that in the period 1900-2025, US stocks have given returns of ~6.5%, while global stocks have had returns of ~5.2%.

So the US market has clearly outperformed in the long-term. However, the US market now makes up a very large share of global equity capitalisation. This means that if you’re investing in a global index fund like Vanguard’s FTSE All-World UCITS ETF (VWRP/ VWRL), ~62% of the stocks are US-based. So, you still get a huge exposure to the world’s largest economy and the country that has perfected capitalism.

While the Trinity Study didn’t directly measure the performance of Global Stocks, our friend at thePoorSwiss has looked into it. A caveat with this research is that international stock data was only available from 1970 to 2023. From 1871 – 1970, the returns of world stocks were assumed to be the same as US stocks.

For a fund like VWRP/VWRL, the approximate mix is 40% ex-US stocks. Interestingly, for a 30-year retirement, a full-US stocks portfolio has the greatest probability of failure. This is not something I was expecting given US stocks have historically outperformed international stocks.

The best-performing portfolios have somewhere between 60 and 80% international stocks. This data shows that having a large international diversification in your portfolio is slightly safer than going all-in on the US – but this effect is only really noticeable at larger withdrawal rates of 4.5% or more.

And for a longer retirement?

Again, the worst portfolio remains the US-only stock portfolio, with the 40% international stocks portfolio somewhere in the middle. The effect of different portfolios is only really noticeable beyond about 4% withdrawal rate.

There is very little difference between a mix of US and international stocks portfolio and a US-only stock portfolio, when it comes to safe withdrawal rates below 4%. Above 4%, it is safer to have a mix of US and international stocks. When planning for a longer retirement up to 50 years, you should aim for a slightly lower SWR in the region of 3 – 3.5%.

Conclusion

Ultimately, the 4% Rule of Retirement gives you a simple, evidence-based framework to answer one of life’s biggest questions: “Do I have enough to retire?” By understanding safe withdrawal rates and considering your portfolio mix – US vs global stocks, equities vs bonds – you can plan with confidence rather than guesswork.

Of course, nothing is guaranteed. Markets fluctuate, and retirement could last 30, 40, or even 50 years. That’s why it’s important to revisit your plan periodically, stay invested in low-cost, globally diversified funds, and adjust your withdrawals if needed.

Even small changes in your portfolio allocation or withdrawal rate can dramatically affect long-term success. But armed with this newfound knowledge, you’re no longer operating in the dark. You have a practical, research-backed approach to making your money last through retirement.

FAQ

Please check out thePoorSwiss.com. It’s a fantastic personal finance blog/website with a host of great information and useful tools. I highly recommend!

If you enjoyed this post, here are some others you may also find interesting:

• The shocking truth of the UK’s investing landscape
• Retire early by not being a moron with your money
• Make consistent investing the #1 priority with your money
• How to slow down your life by buying less

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