The 4% rule and its assumptions

Almost every FIRE calculation starts from one number. It helps to know where it came from, because the short version people repeat has moved a long way from what the research said.

Where it came from

In 1994 the financial adviser William Bengen tested how much a retiree could withdraw each year without running out of money. He used US market returns going back to 1926. He found that a portfolio of stocks and bonds could support a first-year withdrawal of about 4% of its value, raised with inflation each year after that, in every 30-year period in the data. That included retirements that began just before major crashes.

A few years later, professors at Trinity University ran a similar study. Together, the two results became known as the 4% rule.

What it implies

Turned around, 4% gives the number FIRE communities quote most often: you need about 25 times your yearly expenses. If you spend ₹12 lakh a year, the target is close to ₹3 crore. The multiple is 1 divided by the withdrawal rate, so a 3% rule means 33 times and a 5% rule means 20 times.

The assumptions behind it

It was built for 30-year retirements. Someone who retires at 40 may need the money to last 50 years, and the chance of running out rises as the period gets longer.

It used US market history. That century was unusually good for investors. Studies that apply the same method to other countries usually find lower safe rates.

It assumed one portfolio and no fees. Real costs, taxes and a different asset mix all change the number, usually downwards.

It assumed fixed spending. The rule withdraws the same inflation-adjusted amount whether markets rise or fall. Real people adjust, and spending less in bad years improves the odds a lot.

Indian conditions are different. India has had higher inflation and taxes long-term gains differently. Neither is part of the original study.

How to use it

Use it as a starting point for planning, with a wide margin for error. It is not a guarantee. Many people now plan on 3% to 3.5% for long retirements, or keep 4% and plan to cut spending in bad years. Bengen himself has revised the number more than once. The research does not support treating it as a fixed law.

Nothing here is investment advice. See the disclaimer.