At an event last weekend I was chatting with a person who told me that she was planning on retiring early. She mentioned, though, that she was really struggling to figure out how much she was “honestly” going to need to draw down annually during retirement.

She noted that she wanted to maintain the lifestyle she currently has with her long-term partner, which includes travelling two to three times per year, dining out on the weekends and playing golf regularly.

However, she also recognised that retirement would bring shifts in her expenses, with some becoming considerably lower and others increasing slightly. Her greatest fear – which I certainly understand – was running out of money during retirement, particularly given her desire to retire early.

Honestly, her fear is quite warranted. I have heard many stories about people running out of money during retirement and having to rely on their children to fund their remaining years. Some of these situations were self-inflicted, whereas others were the result of a series of unfortunate events. Regardless of the cause, though, running out of money during your retirement years is pretty much a worst-case scenario.

This conversation got me thinking about my own situation and what steps I should take to do everything possible to make sure that I don’t run out of money during retirement. This brought the 4 per cent rule to mind.

The 4 per cent rule comes from a 1994 study by financial planner William Bengen, who wanted to calculate a withdrawal rate that would allow a retiree to safely sustain their savings over a 30-year retirement period.

Bengen analysed historical market data, including both booms and periods of economic downturn. He concluded that retirees would be most likely to avoid financial ruin over the course of three decades if, in their first year of retirement, they withdrew 4 per cent of their initial retirement savings and budgeted based on that amount; in subsequent years, they would then adjust this amount based on inflation (Rosen, 2024).

For those who want to retire early, it is important to note that the 4 per cent rule is designed to provide a sustainable income stream for approximately 30 years. An early retiree, therefore, would need to adjust this percentage of total investments downward to cover a retirement period that may well extend beyond this.

How the 4 per cent rule works

The core principle of the 4 per cent rule is straightforward:

Calculate your initial withdrawal: at the start of retirement, withdraw 4 per cent of your total savings. For example, if you have $1 million saved, your initial withdrawal would be $40,000.

Adjust annually for inflation: in subsequent years, increase the withdrawal amount by the rate of inflation to maintain your purchasing power. If inflation is 2 per cent, then your second-year withdrawal would be $40,800, and so forth.

Maintain consistency: continue this pattern for at least 30 years, a period that aligns with the typical retirement span.

This approach aims to balance the need for income with the preservation of principal, reducing the risk of depleting your savings too early. Its primary benefit is in providing a clear and simple strategy for keeping withdrawals sustainable, thus helping retirees minimise the risk of outliving their savings.

By withdrawing only 4 per cent of their initial savings in the first year and adjusting subsequent withdrawals for inflation, retirees can typically ensure their funds last for about 30 years, which aligns with average retirement durations. This approach reduces the fear of depleting resources prematurely and certainly promotes peace of mind during those retirement years.

Another benefit of the 4 per cent rule is its accessibility: it is straightforward and easy to understand, allowing individuals with varying levels of financial knowledge to employ and adapt.

It encourages disciplined spending, prompting retirees to live within their means and avoid impulsive expenses that could jeopardise their financial security. In addition, the 4 per cent rule provides a flexible framework that can be adjusted, based on market performance and personal circumstances, allowing retirees to modify withdrawals as needed without compromising their overall financial stability.

Furthermore, adopting this rule incentivises early saving and investing during the working years, fostering financial discipline and long-term planning. By aiming for a sustainable withdrawal rate, individuals are encouraged to build a diversified investment portfolio that balances growth potential with risk management.

In essence, the 4 per cent rule for retirement offers a practical, manageable approach that promotes financial security, reduces uncertainty and helps retirees enjoy their retirement years with confidence.

On the other side of the coin, however, there are downsides to following the 4 per cent rule.

One main disadvantage is that it is based on historical market data, which may not accurately predict future investment returns, especially in different economic climates.

Another important consideration is the fact that the 4 per cent rule assumes a 30-year retirement period. However, many retirees are now living longer, exposing them to the risk of depleting their savings over an extended retirement.

The rule also overlooks inflation variability: if inflation rises more quickly than expected, a fixed withdrawal amount may result in less purchasing power, reducing retirees’ standard of living.

Finally, in the event of a market downturn, rigid adherence to the 4 per cent rule can lead retirees to more quickly deplete their funds, especially if they maintain withdrawals during a market slump.

From my perspective, the 4 per cent rule does not account for individual circumstances such as unexpected medical expenses, changes in lifestyle or economic shocks, all of which can significantly impact financial needs. In addition, it promotes a one-size-fits-all approach, which may not suit those with lower savings, higher expenses or different risk tolerances.

Finally, withdrawing a fixed percentage early in retirement can leave little flexibility to adjust for unforeseen events, which can increase the risk of outliving your savings.

Overall, the 4 per cent rule should provide a guide to what is necessary to maintain a lifestyle during your retirement, while avoiding rapid depletion of your assets. However, as always, it is essential to speak with your wealth manager.

Reference

Rosen, A. The Retirement Drawdown Rule. 12 September 2024. Forbes. Available from: https://www.forbes.com/sites/andrewrosen/2024/09/12/the-retirement-drawdown-rule/ [Accessed 23 May 2025].

• Carla Seely has 25 years of experience in the international financial services, wealth management and insurance industries. During her career, she has obtained several investment licences through the Canadian Securities Institute. She holds the ACSI certification through the Chartered Institute for Securities and Investments (UK), the QAFP designation through FP Canada, and the AINS designation through The Institutes. She also holds a master’s degree in business and management