For years, I saved and invested without knowing whether I needed $1 million, $2 million, or $5 million to retire. No target. No finish line. I’d accumulated a six-figure balance across my retirement accounts, but I couldn’t tell you whether that was impressive or inadequate. I remember staring at the number one evening, unable to answer a basic question: am I halfway there, or barely started?
Then I discovered a formula backed by decades of research with a 95% historical success rate. The 4% rule gave me the mathematical clarity I needed as an engineer, a single calculation that told me when I could stop working. I multiplied our annual expenses by 25, and that ambiguous balance suddenly had a concrete finish line.
What Is the 4% Rule and Why It Works
The 4% rule gives you the one thing most retirement advice never does: the math for how big a portfolio you need before you can stop working. Withdraw 4% of your portfolio in your first year of retirement, adjust that dollar amount for inflation each year, and it should last at least 30 years.
Flip it around, and you get your target. Multiply your annual expenses by 25 to get your FIRE number. If you spend $100,000 annually, you need $2.5 million ($100,000 × 25). Withdraw 4% of that $2.5 million, and you get your $100,000 to live on each year! This formula, rooted in the FIRE movement, gives you a clear dollar target for sustaining your expenses indefinitely. Whether you’re pursuing Fat FIRE or Lean FIRE, this calculation is the foundation.
One critical detail that trips people up: the 4% applies to your initial portfolio value, not to whatever the portfolio is worth each year. So if you retire with $2.5 million and withdraw $100,000 in year one, year two you’d withdraw $100,000 plus inflation, say $103,000 at 3%, regardless of whether your portfolio grew or dropped.
Financial planner William Bengen published his research in 1994 analyzing historical market data from 1926 to 1992. He discovered that retirees could safely withdraw 4% of their initial portfolio value, adjusted annually for inflation, and never run out of money over a 30-year retirement, even during the Great Depression and 1970s stagflation. The Trinity Study later validated these findings, showing a 95% success rate with a 50/50 stock-to-bond mix. When the authors updated their research in 2011, they still put safe starting withdrawals in the 4% to 5% range.
How to Calculate Your FIRE Number
Start with what you actually spend. Track every dollar for 3-6 months, including irregular expenses such as annual insurance premiums, car maintenance, holiday gifts, and vacations. Solid budgeting basics and a financial tracking system provide an accurate foundation. I made the mistake early on of thinking we could retire on far less than we actually spent because I wasn’t accounting for “irregular” expenses. When I actually tracked three months, our real spending was far higher than my guess. That honesty, while initially disappointing, gave me a realistic target.
Drop payments that will end before you retire. A mortgage you’ll have paid off by then doesn’t belong in your retirement spending.
Add the costs a paycheck covers today. If you’re retiring before 65, don’t forget healthcare costs: without employer coverage or Medicare, full-price premiums alone can easily add $15,000 to $25,000 per year for a couple in their 40s or early 50s, more for a family, and more as you near 65. An HSA can also cover qualified medical expenses tax-free in retirement.
Add the tax on your withdrawals. If most of your nest egg sits in a traditional 401(k) or IRA, withdrawals are taxed as ordinary income. Someone needing $100,000 in after-tax spending might need to withdraw $120,000-$125,000 to cover the tax bill. Add that tax before multiplying by 25, and the FIRE number moves from $2.5 million to roughly $3-$3.1 million. Roth withdrawals are tax-free, and a mix of pre-tax, Roth, and taxable accounts gives you flexibility to manage your tax bracket. Without a paycheck, the right mix can add up to a zero-tax retirement.
Subtract reliable income from outside the portfolio, such as rent or a guaranteed pension (more on this below), then multiply by 25.
That’s your FIRE number. If you’re a couple, it’s one number for the household (more in the Questions I Always Get below).
Lowering Your Number With Income Outside the Portfolio
Bengen’s math assumes your portfolio covers every dollar you spend, but what if you have rental income or a pension?
I don’t expect my stock portfolio to cover all my living expenses, as I also have rental properties generating income. If my annual expenses are $100,000 and I receive $10,000 cash flow from rentals, my portfolio only needs to cover $90,000. That means my target is $2.25 million ($90,000 × 25) instead of $2.5 million, a difference of $250,000! Every dollar of reliable outside income removes $25 from your FIRE target.
Our rental income didn’t happen overnight. I picked up three properties in 2021 and added a fourth the following year, which came with a steep learning curve and strained our cash flow. All four now produce consistent income through long-term tenants and short-term guests, lowering my target. The properties sit alongside the portfolio as an income stream, never counted inside it.
The same logic applies to a guaranteed pension, a side business, or part-time work you plan to keep doing. Be conservative: if an income stream could disappear, subtract only what it would earn reliably.
Social Security is the exception. I’m not sure it will be there as promised, so I leave it out entirely and treat it as a bonus. For complex situations, seek guidance on rental property income and the various types of income, including earned, portfolio, passive, and business income.
What Counts Toward Your FIRE Number
Every account counts: 401(k), IRA, brokerage, and the one most people forget, the HSA. I treat mine as part of my retirement portfolio, since HSA withdrawals in retirement work like a traditional IRA once you turn 65. I count every liquid asset regardless of type, stocks and crypto investments alike, knowing a crypto slice can swing the total far faster than stocks. Which account you draw from first matters in early retirement.
Recalculate Your Number Every Year
Every year without fail, I sit down with my wife and review our family expenses. We add up what we actually spent and multiply by 25. If our spending rose from $100,000 to $103,000, our FIRE number moves from $2.5M to $2.575M. It cuts the other way too: trim $4,000 and the target drops by $100,000 ($4,000 × 25). I use a tracking app to monitor our overall net worth across investment accounts.
What I discovered when I ran the numbers in 2024 surprised me: I’d already crossed a line I hadn’t been watching for. When the math shows your investments can grow to cover retirement on their own, you still need a paycheck for today’s expenses, but you can choose work for fulfillment, not just pay. That milestone is Coast FIRE. The same 25x math drives your time to FIRE based on your current savings rate.
Free tools like cFIREsim and FI Calc let you model various withdrawal rates against every historical market period since 1871.
Does 4% Hold for a 40- or 50-Year Retirement?
Bengen’s original research covered 30-year retirements, but I plan for 40-50 years, and I still plan on 4%. His 2025 research backs that up: with a diversified portfolio, the worst-case rate is 4.7% for 30 years and 4.2% even for 50. If a longer retirement worries you, don’t shrink the rate. Get to your number sooner by saving and investing more, and keep some income flowing in the early years, from real estate investments or part-time work, so a bad first decade never forces you to sell at the bottom.
I don’t own bonds at all. In retirement, I’ll keep two years of expenses in cash in high-yield savings instead; that’s my buffer against sequence-of-returns risk, the danger that a crash in the first years of retirement forces you to sell low. Your mix will differ from mine, and different allocations yield varying success rates. Understanding your risk tolerance and asset allocation helps you build the one that lets 4% hold.
When and How to Be Flexible with the 4% Rule
The 4% rule is guidance, not a rigid mandate! Bengen himself emphasized that retirees should adjust withdrawals based on market conditions.
When the stock market crashed in 2020 or inflation spiked in 2022, I was still working and still buying, and for a moment wondered whether the whole plan was a mistake. I kept to my plan, and it turned out fine. After FIRE, the same steadiness will come from the flexibility principle: a bad year means cutting back on discretionary spending, not rigidly withdrawing 4%. That’s how you handle market volatility.
If the market drops 25%, we’ll cut back on dining out, skip the big vacation, delay the car replacement, and reduce non-essential spending. That might mean living on $80,000 to $88,000 instead of $100,000 that year. This flexibility improves your long-term success rate by avoiding the sale of assets at depressed prices, which matters most in the early stages of financial independence. The 4% plan is the ceiling: you flex below it when you have to, back up to it when you don’t, and never past it.
Common Misconceptions and Current Debates
You’ll hear “the 4% rule is outdated!” mainly from financial advisors arguing for 3% or 3.5% instead. The rule already survived the Great Depression and 1970s stagflation, and the newest research says 4% is too cautious, not too bold.
The argument for lower expected returns deserves a look, but the rule wasn’t built on average years; it’s the rate that survived the worst starting years on record, when returns ran far below the historical ~10% average for a decade or more. Lower returns mean it takes longer to reach your number, not that you can withdraw less once you’re there.
The original Trinity Study used U.S. returns exclusively. Studies of other countries’ markets have found lower safe withdrawal rates, which is one reason I keep my portfolio in low-cost U.S. stock index funds.
Your FIRE Number Is Your Starting Point, Not Your Finish Line
Plan on 4%, build your number from what you actually spend, save and invest more to get there sooner, and be ready to spend less in a bad year. In Bengen’s data, it held through every crash on record.
Take this year’s actual spending, drop mortgage payments that will end before you retire, add your health insurance and the tax on your withdrawals, subtract reliable income like rent or a guaranteed pension (not Social Security), multiply by 25, and write that number down. Next, your savings rate decides how long it takes to get there.
What You Need to Remember
- Your FIRE number is this year’s actual spending, plus health insurance and withdrawal taxes, minus reliable income like rent or a guaranteed pension, multiplied by 25.
- Plan on 4% for any retirement length; Bengen’s 2025 update puts the safe rate above it, so 4% is conservative, not bold.
- $10,000 of reliable outside income drops a $2.5 million target to $2.25 million, but Social Security is never subtracted; it’s a bonus.
- During market downturns, cut spending instead of rigidly withdrawing the full 4%, backed by two years of cash, so you’re not selling assets at depressed prices.
- Recalculate your FIRE number every year from what you actually spent, because your target will evolve.
Questions I Always Get
Do I subtract dividends from my expenses like rental income? No. Dividends come from the portfolio itself. When you withdraw $100,000 a year from your $2.5 million, some of it comes from dividends and the rest from selling shares; the dividends are included in the $100,000, not on top of it, so subtracting them would count the same money twice. Rent and a guaranteed pension are different: they’re paid by something other than your portfolio, which is why they reduce your number. I don’t even think about dividends: I hold U.S. total-market, S&P 500, growth and tech index funds with dividends reinvested, and the 4% covers everything.
Does the 4% rule work with an aggressive all-stock portfolio? Bengen’s original research used a 50/50 stock-bond allocation. A 100% stock portfolio increases both potential returns and volatility, and it has historically supported higher withdrawal rates in strong markets. The tradeoff is larger drawdowns during crashes, which can be devastating if they hit in your first few years of retirement. It’s close to the no-bonds mix I hold today (index funds plus a small crypto slice), and I’ll add the two-year cash buffer once I stop working. Understand your risk tolerance before you follow, because the first bad decade tests your nerve, not the math.
What if my expenses vary a lot from year to year? Start from this year’s actual spending. If it swings a lot, use your highest year from the past three until it settles; that builds in a safety margin for unexpected costs. Track expenses through a financial tracking system for a full year before settling on a baseline. Variable-income earners should also factor in irregular expenses, such as quarterly taxes or annual insurance premiums.
Should I include my primary residence equity in my FIRE number? No. Your FIRE number represents investable assets generating income, not home equity, which you cannot spend without selling or borrowing. However, owning your home outright reduces annual expenses, which lowers your FIRE number. Some pursue geographic arbitrage in retirement by selling and relocating to lower-cost areas, converting equity into investable assets.
Should couples calculate one FIRE number or two? Calculate one household FIRE number based on your combined annual expenses. This captures shared costs like housing, insurance, and groceries that don’t double with two people. However, both partners should understand the number and agree on the spending assumptions behind it. If one partner plans to retire earlier than the other, model both scenarios separately to see how the timeline changes.