The 4% Rule — A Safe Withdrawal Rate After Retirement

The 4% rule is an empirical rule that if, in your first year of retirement, you withdraw 4% of your saved assets for living expenses, and from the next year on you increase that amount only by the inflation rate, then historically the money did not run dry for 30 years.

For example, if retirement assets are 1 billion won, you spend 40 million won in the first year. If prices rose 3%, the next year is 41.2 million won, and the year after that you again raise it by inflation. The key is not to 'recalculate' 4% of the assets each year but to raise the first year's amount only in line with inflation.

The 4% rule started from a study published in 1994 by the U.S. financial planner William Bengen. Using U.S. stock and bond historical data from 1926, he calculated 'the maximum withdrawal rate that could survive 30 years no matter when in the past you had retired,' and that value was about 4.15%, rounded and called '4%.'

In 1998, three professors at the U.S. Trinity University verified this result with a similar method (commonly called the 'Trinity study'). When applying a 4% withdrawal to a 50/50 portfolio holding half stocks and half bonds, most cases survived 30 years. Depending on the source cited and the type of bond, the success rate is reported in a range of roughly 95%–100%.

The reason 4% looks special is that withdrawing even a little more from here makes the failure probability jump quickly.

In the Trinity study, for a 30-year/50-50 portfolio, raising the withdrawal rate to 5% is reported to drop the success rate to roughly 68%, and raising it to 6% lowers it to roughly 43%. That is, the choice to spend a little more comfortably each year multiplies the probability of running out of money in the later years of retirement by several times.

Conversely, lowering the withdrawal rate makes it safer, but creates a trade-off of having to live frugally in your younger retirement years.

In the 4% rule, the worst scenario for assets running dry usually appears when a crash and inflation overlap 'right after' retirement. This is called sequence of returns risk.

Even at the same average return, if you take a big loss early in retirement, you have less principal to recover with because you're already withdrawing assets for living expenses. In fact, in Bengen's analysis, the hardest case to survive was someone who retired around 1966; this retiree, in the following 1970s, faced weak stocks and high inflation at once, and could barely survive only by keeping the withdrawal rate below 4.15%. Bengen called this 'maximum withdrawal rate that the worst cohort endured' SAFEMAX.

Conversely, those who retired in good times often ended up with assets grown far larger than at the start after 30 years. This means that even under the same 4% rule, the result varies greatly depending on 'when you retired.'

The 4% rule is not an all-purpose formula but one starting point. You should remember the following limits together.

First, this number came mostly from 'U.S.' stock and bond past data. There's no guarantee it applies identically to Korean investors or other countries, or to the future ahead.

Second, taxes, trading fees, fund expenses, and—for overseas assets—the exchange-rate effect eat into the actual amount you can withdraw. The 4% is closer to a theoretical number before these costs are subtracted.

Third, Bengen himself later broadened the data and raised the withdrawal rate to 4.5% in 2006, and more recently to as high as 4.7%. That is, 4% is a 'conservative baseline,' not a fixed correct answer. In practice, flexible-adjustment methods—like cutting spending in bad market years—are also being studied together.