A Critical Look at the 4% Rule
Many people invest to build a nest egg for retirement, or to stop working sooner than planned. A popular tool for this is the well-known 4%-rule. In this article, Toon Cuypers, financial coach at FIRE Belgium, reviews this rule of thumb with a critical lens. “The standard 4% rule is too limited and can be adjusted both upwards and downwards.”
(the NL version of this article was first published in the VFB Magazine)
Financial planning is frequently overlooked, yet it is one of the most critical pillars of a sound investment strategy. As you learn to put your hard earned money to work, it pays to reflect on a few key questions:
- What is driving you to invest?
- What are you hoping to achieve financially?
- Over what timeframe do you want to reach those goals?
- And how much capital are you earmarking for each one?
Belgium’s pension system is under strain, and many people rightly question whether it will still deliver the same benefits a decade or two from now.
At FIRE Belgium, financial planning is a core part of what we do — and the single question I hear most often is: how much do I need to invest for retirement?
That is exactly what this article sets out to answer.
Most of the attention in personal finance goes to growing wealth — the accumulation phase. But knowing how to draw down that wealth sustainably, in the withdrawal phase, is just as important and too often ignored.
There are several approaches to structuring withdrawals, and one of the most widely cited is the 4% rule.
The 4% Rule of Thumb
In 1994, William Bengen set out to answer a deceptively simple question: how much can you safely take out of an investment portfolio each year without running out of money? Working with historical US data on stocks and medium-term government bonds, he arrived at two key findings:
- Withdrawing 4% of the portfolio in year one, and increasing that amount annually in line with inflation, kept the portfolio intact for at least 30 years across all historical scenarios tested.
- He recommended a stock allocation of around 75%, and no lower than 50%. Equities are the primary engine of long-term returns — skimping on them is counterproductive.
In 1998, three Trinity University professors — Cooley, Hubbard and Walz — published what became known as the Trinity Study, expanding on Bengen’s work. Rather than a single safe rate, they calculated success probabilities for a range of withdrawal rates (see figure 1), across different asset mixes and time horizons.
Their conclusion: over a 30-year period, a 4% withdrawal rate succeeded in 95% of all historical scenarios with a 50% equity allocation. That means in 5% of cases, the money ran out before the 30 years were up. Raising equities to 75% pushed the success rate to 98%. Interestingly, a 100% stock portfolio still landed at just 95% — a reminder that more equities is not always the answer. The Trinity Study used corporate bonds rather than government bonds, which explains the slight difference in results compared to Bengen.
A Practical Example
To make this more tangible, consider the following scenario. You plan to draw a regular income from a portfolio of €500,000. In year one, you withdraw 4%, which amounts to €20,000.
In year two, you adjust for inflation — say 3% — giving you €20,600 (€20,000 × 1.03). The year after, with inflation at 2%, you can take out €21,012 (€20,600 × 1.02). And so it continues.
Personal finance is, by definition, personal — and the 4% rule is no exception. Every investor brings a different portfolio, time horizon, spending level, and legacy intention to the table. Treating this rule as gospel would be a mistake; think of it as a starting point, not a final answer.
What About a Global Portfolio?
The 4% rule was built on US market data — but that does not mean your portfolio should be. I am a firm believer in global diversification: spreading across world markets rather than concentrating in the United States.
Wade Pfau ran simulations using stock and bond data from multiple countries, applying a metric called the SAFEMAX. For every 30-year window in the dataset, he calculated the safe withdrawal rate; the SAFEMAX is the lowest of all those rates — the floor that works across every single historical period. His findings:
- A globally diversified index produces a SAFEMAX of 3.5% — slightly below the 3.9% figure for US-only portfolios.
- A portfolio limited to Belgian stocks and bonds? The SAFEMAX drops to just 1.5% — a stark illustration of concentration risk.
The takeaway: with a globally diversified portfolio, a modest downward adjustment from 4% is prudent.
The Impact of Underperforming the Index
The studies underpinning the 4% rule assume you capture index-level returns — not what the average active investor actually earns. Morningstar’s Active/Passive Barometer and SPIVA Scorecards consistently show how rare it is to outperform the market over the long run. Pfau modelled what happens when a portfolio lags the index by just 1 percentage point per year.
The result: a 1 percentage point annual shortfall reduces the SAFEMAX by roughly 0.47 percentage points on average, pulling the safe withdrawal rate from 4.03% down to 3.56%. The average gap between the index-based rate and the underperformance-adjusted rate is 0.65 percentage points.
The relationship is not linear, but the direction is clear: underperformance drags down your safe withdrawal rate. Key point: passive index investors largely sidestep this issue, since they track the index rather than chase it.
Do You Want to Leave an Inheritance?
Both Bengen and the Trinity researchers assumed the portfolio would be fully drawn down by the end of the period. But many retirees want to leave something behind for their children or grandchildren. What does that mean for your withdrawal rate? Pfau examined three scenarios:
- Spending down the entire portfolio: SAFEMAX of 4.03%.
- Preserving the original nominal capital: SAFEMAX of 3.77%.
- Preserving the original capital in real (inflation-adjusted) terms: SAFEMAX of 2.72%.
The more you want to preserve for the next generation, the more conservatively you need to draw down — a meaningful adjustment from the standard 4%.
Spending Patterns in Retirement
Another assumption baked into the original research is that retirees spend a constant amount each year, adjusted only for inflation. Real life tends to be messier. Michael Stein and David Blanchett — working independently — both studied actual retirement spending patterns among Americans and arrived at strikingly similar conclusions.
Blanchett captures this pattern with the concept of the “Retirement Smile” (see figure 2).
Figure2
In the early years of retirement (roughly 65–75), spending tends to be high: people are active, healthy, and finally have the time to travel, dine out, and pursue hobbies. As health begins to decline in the mid-retirement years (75+), discretionary spending typically falls. Then, from around age 85, costs start climbing again — driven largely by healthcare and care needs. This is not a precise formula, but it reflects a recognisable pattern that challenges the flat-spending assumption.
Pfau found that accounting for the Retirement Smile allows the SAFEMAX to rise from 4.03% (flat spending) to 4.73% — a meaningful upward adjustment for those comfortable modelling variable withdrawals.
How Long Will You Need the Money?
The original research was designed with a specific person in mind: a 65-year-old retiree drawing down over 30 years. But not everyone retires at 65, and not everyone lives for exactly 30 more years. For Belgian retirees — especially early retirees — the relevant time horizon may look quite different.
Life expectancy data gives us a useful anchor for estimating how long withdrawals may need to last.
According to the latest Statbel figures, 36% of Belgian women and 22.5% of men reach age 90. Fourteen percent of women make it to 95 — as do 7% of men. If you retire at 65 a 30-year horizon is a reasonable default, but it is not bulletproof — a meaningful share of people will outlive it. Pfau modelled the safe withdrawal rate across different time horizons (see figure 3).
Figure3
Shorter horizons allow higher withdrawal rates: 8% over 10 years, 6% over 15, 5% over 20. Longer horizons demand more caution: for a 40-year period, the safe rate drops to around 3.7%.
Conclusion
The 4% rule is a useful starting point, but treating it as a fixed answer is a mistake. Depending on your circumstances, the appropriate withdrawal rate could be meaningfully higher or lower. The key variables are: how globally diversified your portfolio is, whether you track the index or underperform it, whether you intend to leave an inheritance, how your spending will evolve in retirement, and how long you expect to need the income.
So, back to the original question: how much do you need? The answer flows directly from two inputs — how much you want to spend in year one (with inflation applied to that figure annually thereafter) and the withdrawal rate you consider appropriate for your situation:
- 3% → multiply your target annual spending by 33.3
- 3.5% → multiply by 28.5
- 4% → multiply by 25
- 5% → multiply by 20
Note: all of Wade Pfau’s analyses cited in this article are based on a 50/50 stock-bond portfolio over a 30-year horizon.
If you’re interested to discuss this with Toon, feel free to connect with him on LinkedIn or book an individual consultation (no financial advice).
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With this tool, you can estimate how long you need to reach financial independence and how large your portfolio needs to be. It includes the effects of inflation and investment costs which play an important role in determining your FI date.
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