What is the 4% rule?
The 4% rule states that you can withdraw 4% of your total retirement portfolio each year with a very high probability of the money lasting 30 years or more.
It was developed from the Trinity Study (1998), which analysed historical US stock and bond market data and found that a 4% annual withdrawal survived virtually all 30-year retirement periods in history.
The rule gives you a simple formula: multiply your desired annual retirement income by 25 to find your retirement number.
Example: if you want £40,000 per year in retirement, you need £1,000,000 saved (£40,000 × 25).
How to calculate your retirement number
Step 1: Estimate your annual expenses in retirement. Most financial planners suggest planning to replace 70–80% of your pre-retirement income, since work costs (commuting, work clothes, lunches) disappear.
Step 2: Subtract any guaranteed income. If you will receive a state pension, work pension, or rental income, subtract that from your needed annual income first.
Step 3: Multiply the remaining income need by 25.
Example: you want £35,000/year. You expect £10,000/year in state pension. You need to fund £25,000/year from savings. Your target: £25,000 × 25 = £625,000.
Does the 4% rule still work today?
Some financial planners now recommend a 3–3.5% withdrawal rate to be more conservative, especially for longer retirements or those retiring young (before 55).
For a standard 30-year retirement, 4% remains widely accepted. For a 40–50 year retirement (early retirees), use 3–3.5% to be safer.
The rule also assumes a balanced portfolio of roughly 60% stocks and 40% bonds. A pure cash portfolio would not sustain a 4% withdrawal rate over 30 years due to inflation eroding purchasing power.
The power of starting early
The single most powerful factor in retirement savings is time. A 25-year-old investing £300/month at 7% annual returns will have approximately £900,000 at 65. A 35-year-old doing the same will have roughly £450,000, half as much, despite only starting 10 years later.
This is why financial planners say: the best time to start was yesterday. The second best time is today. Even small amounts invested consistently outperform large amounts invested late.
What about FIRE, Financial Independence, Retire Early?
FIRE is a movement targeting retirement in your 30s or 40s by saving 40–70% of income. The maths is the same, the 4% rule (or 3% for extra safety) applied to a much earlier retirement date.
FIRE requires an extreme savings rate that is not achievable for everyone. But even partial FIRE, reaching financial independence by 50 instead of 65, is a realistic goal for disciplined savers who start early.
