The 4% Rule: Where It Came From and What the Original Data Actually Shows

The study behind the rule

The 4% rule traces to a 1994 paper by Cooley, Hubbard, and Walz — three finance professors at Trinity University — later published in the AAII Journal under the title "Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable." The question they set out to answer was straightforward: across all the market conditions of the past 70 years, which withdrawal rates would have kept a retirement portfolio alive for the full payout period?

They tested annual withdrawal rates from 3% to 12% of initial portfolio value, across five asset allocations (from 100% stocks to 100% bonds), and across four payout periods: 15, 20, 25, and 30 years. All data came from the Ibbotson Associates "Stocks, Bonds, Bills, and Inflation, 1996 Yearbook," using the S&P 500 to represent stocks and long-term, high-grade corporate bonds for the bond allocation. The period covered was 1926 to 1995 — 70 years, including the Great Depression, World War II, the stagflation of the 1970s, and the bull markets of the 1980s and 1990s.

For each combination of withdrawal rate, allocation, and payout period, they calculated the portfolio success rate: the percentage of all historical starting years in which the portfolio survived the full payout without hitting zero. A 15-year payout starting in 1926 means withdrawals through 1940. Starting in 1927 means through 1941. Every available window was tested.

What the data showed for a 30-year retirement

The table below shows portfolio success rates for a 30-year payout period using nominal withdrawals (not adjusted for inflation), based on the study's data from 1926 to 1995:

The 3% and 4% rates achieved 100% success across stock-dominated portfolios for all 30-year periods tested. Every historical starting year, including 1929, survived. The study concluded that "withdrawal rates of 3% and 4% are extremely unlikely to exhaust any portfolio of stocks and bonds during any of the payout periods shown."

One specific data point the study noted: the 100% stock portfolio at a 5% withdrawal rate failed in just one out of 56 fifteen-year periods tested — the window starting in 1929 and ending in 1943. That single failure (the Great Depression onset right at the start of retirement) dropped the success rate to 98%. Everything else at 3–4% held.

The inflation catch — where 4% gets harder

The table above uses nominal withdrawals: you take out the same dollar amount each year. That is not how retirement works in practice. As the study notes, "if inflation averages 3% per year, then the purchasing power of $70,000 will be cut in half by the end of 25 years." Most retirement planning assumes CPI-adjusted withdrawals — you increase the amount you take out each year to match inflation.

When withdrawals are adjusted for inflation (using actual CPI changes from 1926 to 1995), the picture changes substantially. The study's findings for a 30-year payout period with CPI-adjusted withdrawals:

The study's conclusion on inflation-adjusted withdrawals is direct: "withdrawal rates of 3% to 4% continue to produce high portfolio success rates for stock-dominated portfolios. Even the 5% withdrawal rate produces reasonably high portfolio success rates for all payout periods, but the 6% and 7% rates perform reasonably well only for short payout periods. All withdrawal rates above 7% perform poorly for all payout periods."

The dramatic drop in success rates when adjusting for inflation is why the study cautions that "retirees who demand CPI-adjusted withdrawals during their retirement years must accept a substantially reduced withdrawal rate from the initial portfolio." The inflation adjustment that protects your spending power also demands more from the portfolio each year — and over 25 to 30 years, that compounds into a much heavier draw.

What happens to the money that's left over

One result the study highlighted that is less often discussed: even when withdrawals succeed in sustaining the portfolio, the portfolio often grows substantially. For a 75% stocks / 25% bonds portfolio with a 7% withdrawal rate over 20 years, the study calculated an average terminal value of $2,435 on a $1,000 starting portfolio — meaning a $1 million portfolio would end with an average of $2.43 million remaining after 20 years of withdrawals.

That seems counterintuitive. You are taking out 7% per year, and you end up with more than double? The answer is compounding. In good market years, the gains on the full portfolio outpace the withdrawal. Over enough good years, the portfolio grows faster than you can draw it down.

The catch is the minimum: for that same scenario, the worst historical starting year resulted in a terminal value of $0. The average looks good. The worst case is still portfolio failure. That asymmetry — high average, catastrophic floor — is why the study's authors consistently recommended conservative rates and at least 50% stock allocation: "Most retirees would likely benefit from allocating at least 50% to common stocks."

The FIRE movement's use of the rule — and its limits

The Trinity Study was designed for traditional retirees with 15 to 30-year payout horizons. The FIRE (Financial Independence, Retire Early) movement adopted the 4% rule as its cornerstone but extended it to 40 or 50-year retirements — sometimes for people retiring in their 30s.

The study itself flagged this limitation directly: "Early retirees who anticipate long payout periods should plan on lower withdrawal rates." The data tested payout periods up to 30 years. A 35-year-old planning to retire on the 4% rule is counting on a 50+ year runway that the original study never tested.

The authors also offered a pointed reminder about life expectancy planning: "By definition, you have a 50% chance of living beyond your actuarially determined life expectancy, so it is wise to be conservative and add a few years." For early retirees, this caution applies with considerably more force.

Later research — including updated versions of the Trinity Study using data through 2009 and 2018 — confirmed that 4% remained broadly robust for 30-year horizons. For 40+ year horizons, the data more consistently supports 3% to 3.5% as a safer floor. The 4% rule is not wrong for early retirement; it is simply not what was tested.

Sources

• Cooley, Hubbard & Walz — "Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable" (AAII Journal, 1998)

  The primary source for all data in this article. Source of: the portfolio success rate methodology; the 1926–1995 S&P 500 and long-term corporate bond data from Ibbotson Associates; the finding that 3% and 4% withdrawal rates are "extremely unlikely to exhaust any portfolio of stocks and bonds during any of the payout periods shown"; the inflation-adjusted success rate findings (5% reasonable for all payout periods, 6–7% only for short periods, above 7% poor); the $2,435 average terminal value figure for 75/25 portfolio at 7% over 20 years; the quotes on life expectancy planning, CPI adjustments, and the nature of withdrawal rates as planning targets, not contracts.