Stress Testing The 4% Rule

4% Rule

The animal spirits are running high.

Portfolios are growing faster than my waistline at Christmas (trust me when I say it’s a high bar to clear).

Unsurprisingly, people are feeling rich.  Some of them are resigning from their jobs in search of a better gig.

Others are pulling the plug altogether, having figured out a way to turn their nest eggs into little perpetual motion machines.

Hell, even yours truly is entertaining a less lucrative, but far more enjoyable lifestyle.

Now, I don’t see myself leaving work altogether.  Somewhat surprising for a personal finance blogger, early retirement actually terrifies me.

But at times, I do wonder – just how much income could our stock market portfolio reliably deliver in order to supplement my post-IB lifestyle?

Sure, there are plenty of retirement calculators out there. And yet, it’s kind of like skydiving with a parachute packed by someone else.

Probably safe, but I wouldn’t do it.

A notable exception is a wonderful series on safe withdrawal rates from Early Retirement Now.  However, that’s more like an encyclopedia.  Very helpful but will take weeks to work through.

What I want to do in today’s post is something far simpler: a headline stress test of the 4% rule by using historical S&P 500 return data.

To keep things nice and easy, we are going to use some round numbers:

  • You retire with a pot of $1m
  • You hope to draw an annual income of $40k from that pot
  • You withdraw the money at the beginning of every year (a man’s got to eat)…
  • …and you hope not to run out of money before you run out of life

Off we go.

The Naughty Nineties

In recent history, the worst possible move would have been to retire in the late 1990s, just before the dot-com bubble was about to pop.

So let’s have a look at the journey of a retiree who pulled the trigger on January 1, 2000.  Would a $1m portfolio be enough to sustain that 4% withdrawal rate?

Well, as it turns out, yes it was:

4% Rule

It would have been shaky out there for a bit, with the portfolio dropping to $425k post-GFC.  But thanks to a string of solid returns over the past decade, the portfolio would be up to $1.2m by November 2021.

If that looks all fine and dandy to you, it’s time to take a pause – because…


A-ha.  Back in 2000, Britney Spears was still young, and that $40k sure went much further than today.

Assuming a 2.5% annual inflation rate, you actually need about $67k to afford the same lifestyle in 2021.

And once you factor that in, the numbers don’t look so good anymore:

4% Rule - With Inflation

As a matter of fact, they look quite depressing – because instead of $1.2m, you end up with just $323k.

At that rate, you are withdrawing about 20% of your portfolio each year.  And regardless of how optimistic or pessimistic we can feel about the 4% rule, I think we can all agree that the 20% rule just doesn’t work.

Soup kitchen, here we come.

Getting Dynamic

There is, of course, a way out here.  Known by the sexy name of a “dynamic withdrawal strategy”, it involves reducing your income in years when the stock market performance isn’t so good.

In essence, it reduces the quantum of equities you are selling in a downturn while allowing for a “proper” level of spending once the market recovers.

Below, I have re-run the numbers assuming you can cut your spending by 20% in years when Mr. Market heads south.

Then, in years when the stock market is up, you reset your spending all the way up, including any “accrued” inflationary increases.

Here we go:

4% Rule - Dynamic Withdrawal

Unsurprisingly, the dynamic spending helps… but not nearly enough. Twenty-one years later, you end up with just $578k in your portfolio.

Not exactly on the breadline. Equally, the direction of travel is pretty clear here.

Nope, the 4% rule certainly didn’t work for the class of 2000.  But were others equally unlucky?

Meeting The Flintstones

Let’s zoom out and test the 4% rule across the various generations.

The table below shows the ending value of a portfolio after a 20-year retirement depending on the retirement date.

For example, if you retired in January 1950, in twenty years’ time your portfolio would have been worth $9.2m.  Correspondingly, the $67k you were withdrawing would imply a withdrawal rate of just 0.7%.

Here’s what the data looks like for the subsequent years:


Before you beat me to it, I do realize that 20 years is FAR too short for even a regular retirement, leave alone early retirement.

However, I wanted to capture that nasty period in the late 90s / early aughts to show just how much of an outlier it was.  See the numbers highlighted in red above.

Interestingly enough, you DID NOT have to retire at the very peak of the dot-com bubble to put your portfolio at risk.

Doing so a few years prior was equally dangerous, notwithstanding a couple of subsequent bumper years in the stock market.

It wasn’t always that way, of course.  As you can see, folks who retired in the late 70s / early 80s had an absolute home run, ending up with portfolios between $10m and $18m.

Free Advice, Worth Every Penny

I’ve always had a very simple approach to writing on this blog which is to avoid giving advice.

I look at the data and draw my own conclusions.  You should do the same.

(You can also download the underlying spreadsheet here so that you can tweak the analysis as your heart desires)

With that in mind, here is where my head is after looking at the data above.

First of all, the 4% rule works – in the vast majority of cases.  Sometimes, it works really well.  In other situations, it simply does the trick.

But when it doesn’t, it feels kind of like playing Russian roulette with a 1,000 chamber gun.

Sure, the odds are in your favour – but it’s also your grey matter that ultimately ends up splattered all over the floor.

To avoid that unfortunate outcome, you need to build maximum flexibility into your budget.  Arguably it’s much easier to do when you are budgeting for a six-figure annual withdrawal (aka FatFIRE) vs relying on a $20k annual budget.

Equally, someone on $20k a year can easily replace their entire income with a part-time job.  Good luck doing that if you need $150k just to keep the lights on.

The other conclusion I am drawing here is about the advantages of a glide path of sorts.  For example, if you feel you’ve hit your “number”, you can simply take a job that pays you just enough to cover the bills.

Then, you take a year or two to see what happens.

You no longer need to save for retirement.  If markets perform well, you’ve increased your safety net.  If they don’t, you’ve avoided a disaster.  It’s a win-win.

The analysis also reinforces my conviction in having a big chunk of my portfolio in real estate.

Sure, it’s far from a passive investment.  But its ability to throw off cash notwithstanding the market environment, while delivering 10%+ long-term returns, can do wonders to de-risking one’s retirement.

And the final, most obvious observation is to reduce your SWR.

Yes, a more conservative number (let’s say between 3% and 3.5%) means you’ll take longer to retire.  But it will also ensure you only retire once.

As always, thank you for reading – and happy investing!

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Banker On FIRE is an M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.

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22 thoughts on “Stress Testing The 4% Rule”

  1. Great article, risk analysis is fascinating. Thank you. Thank you for your point of view of real estate or part time job. Yes read to the end and ate every last piece of the pie(pun intended).


  2. Thanks for writing this BOF.

    I always laugh when people criticise those for ‘retiring’ or having ‘enough’ as if they’ve made a decision not to work again and they cannot deviate or change route.

    The vast majority of those within the FIRE community are go getters so they always have something else on the go. Whether it’s real estate, consulting, internet assets etc. The 4% rule is incredibly sound as a base but even having real estate alongside your FIRE pot means you can take the pressure off the withdrawal rate.

    It’s a great basis for taking stock and looking to go in a different direction financially; especially when most of the heavy lifting has been done.

    Thanks again for writing this,


    1. Cheers Ryan.

      I agree. The 4% rule is great because it’s simple, catchy, and opens many people’s eyes to the very possibility of early retirement in the first place.

      Once you’ve crossed that bridge, finessing the numbers and figuring out additional sources of income becomes more or less a technicality.

  3. Many folks nearing conventional retirement age (65 back then!) would have been able to purchase an annuity in the UK in the late 90s paying about 8%.

    1. It’s amazing how far we’ve come in a period of just ten years (late 90s to GFC)

      Bond / annuity yields declining by 75%+ is nothing short of seismic. Thing is, no one notices because of the positive impact on asset prices.

      Picture won’t be so pretty if / when yields go back up!

  4. Glad you touched on this. I’ve spent a lot of time over at ERN, and making sense of it all and how to implement it sure isn’t an easy project.

    My own conclusions: 3.25% is the safest withdrawal rate, and a glidepath into equities versus taking defensive positions is best for early retirees.

    Also to your point, a source of income from real estate or business dividends can go a long way. Which is why I recently bought a website. Right now it feels a bit like work, but my hope to is to build a system to offset that 4-hour work week style.


    1. I quite like ERN’s glidepath idea.

      I suppose it’s the financial equivalent of either having a job for the first few years of “retirement” or holding on to enough cash to cover your expenses if the market goes south.

      Saw the website purchase news – would love to hear how it’s going so far!

  5. Banker,
    Please, lets not misinform your audience about the 4% Rule. Bengen (1994) is the father of the 4% rule and the Trinity Study (1998) concluded that for a portfolio 60% stocks / 40% bonds, a 4% withdrawal with an annual inflation adjustment would last 30 years. The methodology backtested for all 30 year periods back to 1871. It turns out that there are (2) times that will stress your portfolio
    – retiring in 1929 (right before crash and great depression)
    – retiring in 1966 (right before the stagflation of late 60’s and decade of the 1970’s

    Your 22 years starting in 2000 uses 100% stocks and still looks to be just fine.

    Now for retirements longer than 30 year, 4% is too high. You will need use 3 to 3.25% for a 50 year retirement.

    1. Factually correct and all fair points.

      However, the idea here was not to refute Bengen’s findings. Rather, it’s to stress test the portfolio to show how it performed in the worst stretch in recent history.

      Too many people take the 4% as gospel which is obviously a bad idea.

  6. Can’t the ‘sequence of return risk’ just be avoided by shifting to bonds for a few years before and after retirement (accepting a lower return in that period)?

    1. Yes, that’s actually the idea of the glide path.

      Somewhat counterintuitively, you load up on bonds at the beginning of your retirement but then slowly rotate back into equities (because you need the equity returns to sustain you through a 40+ year retirement!)

  7. goodmoneygoodlifecom

    Thanks for putting this analysis together. I’ve always thought the 4% rule as a little risky, but didn’t know that you’d dwindle down $1M to $300K when you account for inflation. Almost seems like as a rough rule of thumb, if inflation is 2.5%, you’d want to do like a 1.5% rule (4-2.5%) as a initial safety measure. But then if you’d really like to build a moat around, I’m wondering if 0.75% rule is a bit too conservative (i.e. will take way too long).

    I guess with inflation, your rents that you charge will go up with inflation so you’re somewhat insulated from inflation outpacing your withdrawal rates + market volatility. But on the flip side, it seems like inflation would also cause companies to charge more for their products/services and so stocks should also be somewhat inflation-protected?

    Inflation’s the talk of the town nowadays so I’m just wondering if there’s a clean way to just insulate myself from it. Suppose I do 3% or 2.5% — it’s still hard to predict what future inflation would be like to know if that’s enough for example.

    1. I reckon inflation is really 5%+ maybe 10% for the basics and thats not including fuel, whether it is gas, electric or petrol which are just sky rocketing.
      That really mrsses up the numbers

      1. I think this year it’s definitely 10%+, but it was pretty low over the past 15 years or so, notwithstanding all the central bankers’ efforts.

    2. Stocks and real estate are a good hedge.

      Real estate is pretty much instant (unless you are in a rent controlled area, in which case you’ve got to wait for your tenants to churn)

      Stocks can be very volatile in highly inflationary periods but tend to come through at the end of the day.

  8. interesting analysis. I am surprised the numbers for the 4% w/r at 1999 are quite as bad as they are for a portfolio invested in the S&P 500. Take a look at the very bottom chart to the following link, which looks at this on a variety of portfolios the closest being 75:25 S&P/ FI from 1999.

    Here the 4% w/r is looking still ok for a 30 year retirement ending 2030

    In fairness, the 4% rule is a combination of stocks and bonds and you’ve applied it solely to the S&P 500. But it does go to show you can’t take a historical analysis and apply to something else.

    There are also a few uninformed / deliberating misleading (?) bloggers who are using the decade bull market to say, just invest in the S&P 500 (or whatever) and you’ll never need to work again with a 4% w/r into perpetuity. Your analysis clearly shows that’s potentially rubbish. As soon I see a website saying that, I’ll never go back and read another blog piece. Odds on historically that’s true but given your life is one pathway and not an average – it’s like Russian roulette – should be ok but…….

    In any event, it very clearly shows to me that the vast majority of retirees are never going to be able to accept that level of volatility within their portfolio. Picture ‘retiring’ in Jan 2022 and 2 years later your portfolio is down 50% per the above analysis in some years. It would be an interesting conversation telling your family, it’s ok, historically it’s all been fine :).

    Having been thinking about this for a few years, I am much closer to the idea of ‘coast fat fire’. i.e. get as big a pot as possible and then have some employment income in a more relaxed fashion to pay day to day expenses etc. The trick being the balance of when. It’s certainly coming up the tracks for me.

    1. I think the 4% rule serves it’s purpose – it’s simple, catchy, and does a good job of being a “gateway drug” of sorts into the concept of FI.

      But to rely on it as gospel is a bold move indeed. Somehow, most discussions around SWR exclude the impact of taxes (beyond me why), the bond allocation, sequence of returns risk etc etc

      I also cannot imagine retiring without a glide path of some sort btw… seems like a wasted opportunity not to take a job that will feel like a part-time gig compared to IB!

  9. “First of all, the 4% rule works – in the vast majority of cases.”

    I’m not entirely convinced by that. If you use UK data, accept that many are unlikely to be happy with 100% equities in retirement, add on fees and (potential) investor misbehaviour, and adjust for a retirement horizon that is longer than 30 years, the “4% rule” is not that convincing, IMO.

    1. I was making an implicit assumption that one would go with either a world tracker, or US equities (a personal favourite of mine)

      Agree on all other points though. I’m certainly not going to stake my own retirement on the 4% rule!

  10. ERNs clear conclusion – fantastic site he has is 3% is now safe in all circumstances this is pre tax and pre fees. I am working on 2.8% for tax. But I am aiming at 90% stocks for higher distribution outcome even for a similar median wealth outcome at period end

    Interestingly, his site examines what happens if you retire at a peak and the market crashes – the interesting point is your cash sum stays flat while asset values drop (but SWR rises almost exactly equal to match). So 3% turns into 4% swr with a drop in market 3/4 (25%) – so your cash sum is still safe.

    One thing I agree with you BoF – volatility of Real estate cashflows is lower than volatility of dividends which is lower than volatility of stocks. These are also useful for cashflow certainty (CFaR) when examining how certain or uncertain your cashflow ‘income’ is vs ‘expense’

    1. ERN’s analysis is top-notch

      As far as real estate goes, I have found residential to be pretty stable but with much less upside.

      Commercial, on the other hand, can be a fantastic money maker but more volatile. But perhaps that’s just my experience with a restaurant tenant in Covid.

      Am sure there are plenty of people with triple-net leases that just had to ring the cash register once a month over the past year.

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