How long will $500,000 last using the 4% rule?

What the 4% rule is and why it matters, retirement planning tips

Origin and definition

The 4% rule sets a first year withdrawal equal to 4% of a retiree’s portfolio, then adjusts that dollar amount each year for inflation. This simple prescription comes from historical simulation work in the 1990s that tested long term periods of market returns to see what withdrawal level would have been sustainable over multiple decades, and it remains a useful baseline for retirement planning discussions Bengen paper in Journal of Financial Planning.

The rule’s appeal is clarity, not certainty. It gives a single starting number, then an inflation adjustment, so readers can convert a portfolio balance into a target annual withdrawal and test whether that income fits their needs. The original research used historical sequences of stock and bond returns, not future forecasts, which is why the rule is best described as a heuristic rather than a guarantee Trinity Study summary.

How the rule is applied in practice

In practice, many people treat the 4% rule as a planning shorthand: calculate 4% of savings to get a first year withdrawal, then raise that dollar amount each year by inflation. That makes budgeting straightforward, and it is simple to compare different portfolio sizes or spending plans without building a full simulation.

At the same time, using the 4% rule requires awareness of its limits. The historical tests behind the rule assumed specific periods of market performance and interest rates. If future returns or inflation differ materially from past periods, the rule’s safety margin changes. Good planning treats the rule as a starting reference and then layers scenario testing and tax modeling on top.

Calculating $20,000 from $500,000, retirement planning tips

Step-by-step math for the first-year withdrawal

Step 1, compute 4% of the portfolio. For $500,000, 4% equals $20,000. That is the canonical first year withdrawal under the 4% rule.

Step 2, note that this $20,000 is the gross portfolio withdrawal. It does not automatically equal spendable, after-tax income, because taxes or account rules can reduce the cash available to spend. Later sections show how taxes and required distributions change the net amount.

Step 3, use the first year withdrawal to set a baseline budget. For example, if a retiree needs $20,000 in annual spending, a $500,000 portfolio at a 4% starting rate matches that need on a gross basis. If the retiree needs more, the starting rate or other income sources must be adjusted.

How inflation adjustments work in year 2 and beyond

Under the rule, the dollar withdrawal is increased each year to keep up with inflation. For a 2 percent inflation year, year two withdrawal would be $20,400. For a 4 percent inflation year, it would be $20,800. Using the Consumer Price Index as a reference helps pick realistic inflation scenarios when testing how long a fixed real-dollar plan lasts CPI data from the U.S. Bureau of Labor Statistics.

That inflation adjustment protects purchasing power but also raises the dollar outflow from the portfolio. Over long retirements, higher sustained inflation increases the cash drain and shortens how long a fixed inflation-adjusted withdrawal can last, so it is important to model low, medium, and high inflation paths.

Why 4% may be less safe for retirees starting today, retirement planning tips

How current market valuations and bond yields affect safe rates

Practitioner research through 2024 and 2025 has generally recommended more conservative starting withdrawal rates than the original 4 percent, often in the neighborhood of 3.5 to 3.8 percent for many U.S. retirees. Those recommendations reflect higher equity valuations and lower bond yields, which reduce the historical safety margin behind the 4 percent result Morningstar analysis on safe spending rates.

Mechanically, when expected future returns on stocks and bonds are lower than the historical averages used in the 1990s simulations, a fixed 4 percent starting withdrawal has a smaller buffer against bad sequences of returns or prolonged low returns. That is why many practitioners recommend testing lower starting rates or flexible rules for retirements starting in the mid 2020s Vanguard Research on withdrawal rates.

Recent practitioner research and recommended starting rates

The practical implication is straightforward: a 3.5 or 3.8 percent starting withdrawal lowers the first year cash draw, improving the statistical chance a portfolio lasts over a long retirement, at the cost of lower initial spending power. For a $500,000 portfolio, a 3.5 percent starting rate equals $17,500 in the first year, while 3.8 percent equals $19,000. Choosing among those rates depends on your other income, spending needs, and willingness to adjust later. See recent analyses like Investopedia coverage on withdrawal rates for another practitioner perspective.

Because these are practitioner recommendations, not guarantees, the right starting rate for any individual depends on personal factors such as time horizon, asset allocation, and tax status. Use these lower starting rates as alternative scenarios when testing your plan.

Sequence of returns risk and inflation: stress tests to run, retirement planning tips

What sequence-of-returns risk is and why early losses matter

Sequence of returns risk refers to the effect that the order of investment returns has on a portfolio that is taking withdrawals. A string of negative returns early in retirement can deplete the portfolio enough that subsequent positive returns cannot fully recover the loss, making a fixed inflation-adjusted withdrawal unsustainable in some scenarios analysis on sequence of returns risk.

For the $500,000 example, two retirees who both face average long run returns could have very different outcomes depending on whether poor returns happen in the first five years. That is why testing sequences, not just averages, matters when judging how long a withdrawal plan will last. See also the Safe Withdrawal Rate Series for additional sequence testing approaches Safe Withdrawal Rate Series.

Run low, medium, and high inflation scenarios and compare outcomes

Inflation interacts with sequence risk. Higher sustained inflation increases the annual cash outflow, which can accelerate depletion if returns are weak early on. Running low, medium, and high inflation paths alongside different return sequences reveals how sensitive portfolio longevity is to both forces CPI data from the U.S. Bureau of Labor Statistics.

A practical stress test compares several combinations: optimistic returns with low inflation, average returns with medium inflation, and poor early returns with high inflation. For each combination, tally years of coverage under the fixed withdrawal rule and note scenarios where spending cuts or other adjustments are required.

Taxes, RMDs, and net income: what changes the math, retirement planning tips

How account type and taxes affect available cash from withdrawals

Gross portfolio withdrawals are not the same as spendable income. Withdrawals from traditional tax-deferred accounts are generally taxed as ordinary income, which reduces the cash left for living expenses. Modeling gross to net requires applying likely tax brackets and acknowledging that distribution timing affects taxable income levels research highlighting tax and withdrawal interactions.

If most savings are in Roth accounts, withdrawals may be tax free and the net spendable amount is closer to the gross withdrawal. Many retiree plans combine tax-deferred, tax-free, and taxable accounts, so a layered withdrawal strategy can affect both taxes and portfolio longevity.

Required minimum distributions and timing considerations

Required minimum distributions can force larger taxable withdrawals later in retirement, which affects net income and effective portfolio drawdown. RMD rules and ages have changed over time, so it is important to model current IRS rules when estimating how long a portfolio will support a target withdrawal.

Because RMD timing can create a mismatch between tax-driven withdrawals and spending needs, planning often includes sequencing account withdrawals to manage tax brackets and preserve after-tax income where possible. That sequencing matters when assessing whether $500,000 will deliver a target net income for the retiree.

Alternatives and adjustments to the fixed 4% rule, retirement planning tips

Dynamic withdrawal rules and safe guarding spending

One alternative is a dynamic withdrawal rule that reduces spending after poor market returns and allows modest increases after strong returns. These rules try to reduce the chance of permanent depletion while still providing some spending flexibility when markets cooperate Vanguard Research on withdrawal approaches.

Dynamic rules require discipline and a communication plan for partners or family, because income can vary. They can improve long term sustainability versus a rigid inflation-adjusted dollar plan, at the cost of less predictable cash flow in retirement.

Buckets, partial annuitization, and delaying withdrawals

Bucket strategies set aside short term cash or bond reserves to cover near term spending, letting equities stay invested for growth. Partial annuitization converts a portion of the portfolio into guaranteed lifetime income, which reduces sequence risk for the remaining balance. Each approach trades off flexibility, fees, and inflation protection in different ways practitioner discussion of alternatives.

Delaying retirement or delaying full withdrawals can also increase the probability a given withdrawal rate lasts. For example, working longer increases savings and may shift the starting withdrawal rate downward relative to the portfolio balance at retirement.

A simple decision framework to choose an initial withdrawal rate, retirement planning tips

Checklist of personal factors to consider

Use a short checklist when choosing a starting withdrawal rate. Consider portfolio asset mix, time horizon, other guaranteed income like Social Security or pensions, tax status, spending flexibility, and personal risk tolerance. These factors change whether 4 percent, 3.5 percent, or a different starting rate makes sense for you Vanguard Research on retirement planning factors.

Write down your fixed expenses and discretionary expenses. If fixed needs are small relative to portfolio withdrawals, you may accept more variability in withdrawal strategy. If fixed needs must be met, prioritize sources of guaranteed income or more conservative starting rates.

How to run a quick sensitivity test

A simple sensitivity test runs three return sequences and three inflation paths for each candidate starting rate. Compare outcomes as years of coverage or probability of lasting 30 years. If a lower starting rate materially improves outcomes across bad sequences, that is a sign to prefer the lower number or add protections like buckets or partial annuitization.

Keep the test short and actionable. Adjust one variable at a time, such as lowering the starting rate while keeping other assumptions constant. This helps isolate which assumptions most affect longevity and guides a practical choice under uncertainty.

Common mistakes people make when testing the 4% rule, retirement planning tips

Ignoring taxes and fees

A common error is to assume gross withdrawal equals spendable income. Taxes, investment fees, and transaction costs reduce the cash available from a portfolio. Include realistic tax assumptions and expense ratios when modeling withdrawals to avoid overly optimistic results work on withdrawal and tax interactions.

Another frequent mistake is using average returns alone. Averages hide sequence-of-returns risk, which is crucial for a plan that takes cash from the portfolio early in retirement.

Relying on a single historical scenario

Testing only a single historical window or only average returns gives a false sense of security. Run multiple scenarios that include adverse sequences and higher inflation to see conditions where a fixed withdrawal rule might fail. Simple fixes include running Monte Carlo or historical sequence tests and then checking sensitivity to inflation assumptions CPI data for inflation scenarios.

When readers catch these common mistakes, quick corrective steps include adding taxes into the model, testing several return orders, and considering a more conservative starting rate if uncertainty is high.

Practical scenarios: three sample plans for different retirees, retirement planning tips

Case 1, single retiree with conservative allocation

Assumptions: $500,000 portfolio, 40 percent equities and 60 percent bonds, no pension, delayed Social Security, starting withdrawal 3.5 percent. A conservative allocation and lower starting rate reduce sequence risk and improve odds the portfolio maintains a steady withdrawal for long retirement horizons. In many scenarios this setup will need modest spending flexibility if returns are weak, but it is oriented to preserve principal and reduce volatility.

Outcome note, this plan emphasizes capital preservation, not maximum initial spending. It can fit retirees who prioritize maintaining a legacy or who expect to leave part of the portfolio to heirs.

Case 2, couple with mixed accounts and Social Security

Assumptions: $500,000 portfolio split across tax-deferred and taxable accounts, partial Social Security starting at normal retirement age, 60 percent equities, 40 percent bonds, starting withdrawal 4 percent. Other income from Social Security reduces the portfolio share of required spending, so the portfolio-only withdrawal can be smaller or used as discretionary spending. Tax-aware sequencing of account withdrawals helps manage taxable income and net spending power.

Outcome note, couples with Social Security have more flexibility to accept a slightly higher starting withdrawal for discretionary spending, while preserving guaranteed income for essentials.

Case 3, partial annuitization plus withdrawal

Assumptions: $500,000, convert 25 percent to an income annuity that covers essential expenses, keep 75 percent invested and use a 4 percent rule on that remaining pool. Combining a partial annuity and a withdrawal rule reduces sequence risk for baseline needs while allowing growth potential on the invested remainder.

Outcome note, partial annuitization reduces the stress of sequence risk but reduces liquidity and may come with fees or surrender considerations. It is a trade-off many retirees consider when they value guaranteed income for core expenses.

Next steps checklist and resources to run your own tests, retirement planning tips

Practical next actions

Use this six step checklist to move from reading to testing. Step 1, gather balances and account types. Step 2, record other income streams like Social Security and pensions. Step 3, choose an asset mix to test. Step 4, run multiple return and inflation scenarios. Step 5, model taxes and RMD timing. Step 6, pick a withdrawal rule that allows some flexibility if you face high sequence risk or inflation uncertainty Vanguard Research for practical guidance.

Where to look for reliable data, start with the Consumer Price Index for inflation history and practitioner research summaries for current safe starting rates. Use free historical return series where available, and check conclusions against several practitioner sources before deciding.

FinancePolice role and verification guidance

FinancePolice role and verification guidance

FinancePolice provides plain language explanations and decision frameworks to help you understand trade-offs. It is not a substitute for personalized tax or financial advice. Verify your assumptions with primary sources, and consult a tax professional or certified planner if you need tailored projections. Visit our homepage for more guides.

Final pragmatic thought, for a $500,000 portfolio the 4 percent rule translates to a clear, testable starting point, but whether it will last depends on sequence of returns, inflation, taxes, and your tolerance for spending flexibility. Model those variables before choosing a path.

Quick links

For a simple budgeting start, see our how to budget guide and check practitioner research in our investing category when refining assumptions.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.