Definition
The 4% Rule
The 4% rule is a retirement guideline suggesting you can withdraw about 4% of your portfolio in the first year and adjust that amount for inflation thereafter, with a reasonable chance it lasts roughly 30 years.
It implies a corpus of about 25 times your first year's spending. The rule originated from US historical data, so Indian retirees should treat it as a starting point rather than gospel — higher inflation, different return profiles, longer family-supported lifespans and a typically shorter data history mean many advisers here lean toward a more conservative withdrawal rate.
The rule is most useful as a sanity check on whether your corpus is adequate, not a rigid spending plan. Pairing it with flexible spending (trimming in bad years), a bucket strategy for the first few years' expenses, and attention to sequence-of-returns risk makes early retirement far safer.
Related terms
- Retirement CorpusA retirement corpus is the total lump sum you need to have accumulated by retirement to fund your living expenses for the rest of your life.
- Safe Withdrawal RateThe safe withdrawal rate is the percentage of your retirement corpus you can take out each year with a low risk of running out of money over your expected lifespan.
- Sequence-of-Returns RiskSequence-of-returns risk is the danger that poor investment returns early in retirement — when you are withdrawing money — can permanently damage your portfolio, even if average returns are fine.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.