What is the 4% rule?
It's a rule of thumb: you can withdraw 4% of your portfolio in the first year and adjust that amount for inflation each year after with a good chance the money lasts. Turned around, the nest egg you need is 25 times your yearly spending.
It comes from U.S. research: William Bengen's 1994 study and the Trinity study (Cooley, Hubbard and Walz, 1998). In the Trinity study, a 4% withdrawal adjusted for inflation lasted in about 95% of historical 30-year periods, with portfolios of U.S. stocks and bonds. Over longer periods, the success rate drops.
That makes it a starting point, not a guarantee. If you plan to live off your investments for more than 30 years, a lower rate gives you more room. The calculator lets you change the withdrawal rate and compares them in the table.
How does the calculator work?
First the target: monthly spending × 12 ÷ withdrawal rate. Spending $4,000 a month at a 4% rate gives $1,200,000.
Then the time: month by month, the balance earns the monthly rate and receives your contribution, until it reaches the target. An annual rate becomes the equivalent monthly rate, (1 + annual rate)^(1/12) − 1, and each contribution goes in at the end of the month.
Spending is in today's dollars, so use a real return, with inflation already subtracted. Results are before income taxes and fees.
How long does it take to get there?
It depends on your contribution, the return and the withdrawal rate. Starting from zero, contributing $1,500 a month at a 5% real return, and spending $4,000 a month:
- 4% withdrawal: target of $1,200,000, in 29 years and 9 months ($535,500 from your pocket and $668,272.52 from growth).
- 3% withdrawal: target of $1,600,000, in 34 years and 5 months.
- 5% withdrawal: target of $960,000, in 26 years and 4 months.
Contributing more shortens the road a lot: at $3,000 a month, the $1,200,000 target arrives in 19 years and 10 months.
3% withdrawal
- Nest egg
- $1,600,000
- Time
- 34 years 5 months
4% withdrawal
- Nest egg
- $1,200,000
- Time
- 29 years 9 months
5% withdrawal
- Nest egg
- $960,000
- Time
- 26 years 4 months
Once you know the target, what's next?
The number is only half the job: the portfolio also has to be spread so the risk sits where you're comfortable. To keep your portfolio on the mix you chose (stocks, international, bonds), each contribution should go to what's furthest below target. That's what Allocta works out: tell it how much you're investing this month and it shows how much goes into each holding. Because it only uses new money, there's nothing to sell, so no capital gains tax on a sale in a taxable account.
FAQ
How much do I need to live off my investments?
With the 4% rule, 25 times your yearly spending. Spending $4,000 a month takes $1,200,000. A lower withdrawal rate asks for more: at 3%, the same spending takes $1,600,000.
Does the 4% rule still work?
It's based on historical U.S. data and doesn't guarantee future results. Returns, inflation and your time horizon all matter. Treat it as a starting point and test lower rates in the calculator.
Which return should I use?
A real return, above inflation, because spending is in today's dollars. It's an assumption: no investment guarantees a return, and a lower return means more time to get there.
Does it include taxes?
No. Results are before income taxes and fees. Taxes on gains reduce your net income, so it pays to leave room in your spending or your target.
What if I already have money invested?
Enter it under "Amount you already have". It grows alongside your contributions and shortens the time. If it alone already covers your spending at the chosen rate, the calculator tells you you're already there.
Calculate your next contribution in Allocta
Your first 7 days are on the Plus plan, with everything unlocked.