Week 11 Day 1: How Much Is Enough to Retire?

This simple formula comes from decades of research. If you withdraw 4% of your portfolio in year one and adjust for inflation each year after, historically your money lasted 30+ years with a diversified stock/bond portfolio. $50,000/year x 25 = $1,250,000. $40,000/year x 25 = $1,000,000. $70,000/year x 25 = $1,750,000.

The beauty of the 4% Rule is that it gives you a concrete target. Instead of the vague 'how much do I need to retire?' you get a specific number tied to your actual spending. Step 1: Calculate your annual expenses (or desired retirement spending). Step 2: Multiply by 25. Step 3: That is your portfolio target. The 25x multiplier is simply the inverse of 4% (1/0.04 = 25). This means your portfolio is 25 times your annual withdrawal, meaning you are drawing down 4% per year -- a rate that has historically sustained portfolios through 30-year retirements in nearly every market scenario tested. The key insight: your retirement number is based on spending, not income. A person earning $200,000 who spends $60,000/year needs only $1,500,000 to retire. A person earning $80,000 who spends $75,000/year needs $1,875,000. Spending is the variable that determines your financial independence.

The 4% Rule originates from William Bengen's 1994 study 'Determining Withdrawal Rates Using Historical Data,' published in the Journal of Financial Planning. Bengen tested every possible 30-year retirement period from 1926 forward using historical U.S. stock and bond returns. He found that a 4% initial withdrawal rate (adjusted for inflation annually) survived every historical period, with the worst case being a 1966 retiree (who faced the 1970s stagflation). The '4% Rule' is more precisely a '4% safe withdrawal rate (SWR)' -- the maximum initial withdrawal rate that historically never depleted the portfolio within 30 years. Subsequent research by the Trinity Study (Cooley, Hubbard, and Walz, 1998) confirmed and extended Bengen's findings across various asset allocations. A 50/50 stock/bond portfolio had a 95% success rate at 4% withdrawal over 30 years; a 75/25 stock/bond portfolio had a 98% success rate.