4% Rule — What is it? Safe withdrawal rule in FIRE
The 4% rule is a rule determining the safe level of annual withdrawals from an investment portfolio in retirement. Learn its assumptions, criticism, and alternatives.
Definition
The 4% rule (4% rule or safe withdrawal rate) is a financial rule stating that you can withdraw 4% of the initial portfolio value (adjusted for inflation) annually without risk of depleting funds for at least 30 years.
Where does the 4% rule come from?
The rule was formulated by William Bengen in 1994 based on analysis of historical U.S. market data (1926–1992). Later confirmed by the "Trinity Study" — research by Trinity University professors.
Bengen studied the worst possible times to start withdrawals (e.g., just before a crash) and found that 4% annually was safe in every 30-year period.
How to apply the 4% rule?
Calculating FIRE goal
FIRE Goal = Annual expenses × 25
| Monthly expenses | Annual expenses | FIRE goal (×25) |
|---|---|---|
| 4,000 PLN | 48,000 PLN | 1,200,000 PLN |
| 6,000 PLN | 72,000 PLN | 1,800,000 PLN |
| 10,000 PLN | 120,000 PLN | 3,000,000 PLN |
In practice
- Accumulate 25 times your annual expenses
- In the first year, withdraw 4% of the portfolio
- Each year, increase the withdrawal by inflation
- The portfolio (stocks + bonds) continues working
Criticism and limitations
- Based on U.S. data — European markets have historically delivered lower returns
- 30 years may not be enough — FIRE at age 35 means needing 50+ years of withdrawals
- Doesn't account for taxes — In Poland, the Belka tax reduces actual withdrawals
- Sequence of returns — A crash early in retirement is much more dangerous than a mid-retirement crash
Alternatives
- 3.5% rule — More conservative, safer for longer horizons
- Dynamic withdrawals — Reduce withdrawals in bad years, increase in good years
- Guardrails strategy — Set upper and lower withdrawal limits
How Freenance can help
The FIRE calculator in Freenance uses the 4% rule to calculate your financial goal. Based on current expenses, savings, and investment rate, it shows when you'll achieve financial independence.
👉 Calculate your FIRE goal — freenance.io
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