Have you ever asked yourself: 4% of What?

4 percent rule

The Trinity Study and the 4 percent rule of safe withdrawal form the bedrock of the financial independence and early retirement movement. If we did not believe that there exists some safe withdrawal rate that offers us a high probability of success should we choose to subsist off of the teats of our portfolio, those of us invested in the market and uninterested in landlording couldn’t even begin to contemplate retiring early.


The Trinity Study is not new – the results have been around for nearly two decades now. Given how core the results of the study are to early retirement, we cannot emphasize enough the importance of understanding those results. At first glance the results seem almost childlike in their simplicity. But is everything quite as simple as it seems? How well do we truly understand the results of the Trinity Study?


4% of What?

We love to bandy about the 4% SWR (Safe Withdrawal Rate). The more conservative amongst us choose 3% or 3.5% instead. But here is a question that gets asked repeatedly on various financial forums: 4% of what exactly? There are three options on the table:


  1. 4% of your initial portfolio value, on the day of your retirement.
  2. 4% of your current portfolio value.
  3. 4% of your initial portfolio value, adjusted for inflation.


Option 3, you choose triumphantly, holding out your hand for your gold star. Not so fast, young padawan. See if you can riddle me this.


Imagine that Michael has a portfolio worth $1,000,000 in the year 2010. Michael retires and, pursuant to the 4% rule, he withdraws $40,000. The market is a raging bull and in 2011, his portfolio is now worth $1,200,000. In accordance with option 3 above he does not get to withdraw $48,000. He must again withdraw $40,000, adjusted for inflation. If there was no inflation, Michael gets to withdraw $40,000 again, even though his portfolio is larger.

Enter stage right a second retiree, Mohini, whose portfolio is the identical twin of Michael’s portfolio. So she too has $1,200,000 in the year 2011. She decides to retire that year, and, as Michael did, applies the 4% rule to get a withdrawal rate of $48,000 a year.

According to the Trinity Study Michael and Mohini, who have portfolios with identical asset allocations and diversification, both have very similar probabilities of success with respect to their portfolios lasting the length of their retirements. Why then does Mohini get to withdraw $8,000 more just because she retired one year later? Why does Michael have $8,000 less to spend on hookers and blow? Mohini’s more cushy lifestyle appears to be an artifact of the luck of the draw – she just happened to work a year extra. It would appear that Michael should be able to adjust his withdrawal amount up to be the same as that of Mohini. So is the correct answer to the quiz above option 2?


The argument is a compelling one, and one can see why the confusion persists around the question of 4% of what. Fear not, option 3 was the correct answer and you can hang on to that gold star.

Here is why Michael should stick to 4% of $1,000,000 and not keep re-retiring every year and adjusting upwards.

Imagine that both Michael’s and Mohini’s portfolios have a 95% probability of success. In other words, there is a 95% chance that their portfolios will last them till their death and maybe beyond and a 5% chance that they will end up Sad Pandas eating beans under the bridge in their old age.

Here is another way to visualize that 95% probability. At the start of retirement, Michael is offered a bag with a 100 balls in it. 95 of those balls have the word ‘success’ on them, 5 of them have the word ‘failure’. He puts his hand in and picks one. Aha! Success!

If Michael wants to keep readjusting his withdrawals, this, from the perspective of our probability analogy, is the same as having him start every year by putting his ball back into the bag and choosing again. He might be lucky enough to choose success. Then again, he might not. If he keeps drawing balls, he is making his choice over and over again and he has a higher probability of choosing a ball labeled failure.


The key thing to remember is that at the start of a particular instance of retirement, we don’t know which ball has been picked. In other words, Mohini may have a ball labeled success, or she may have a ball labeled failure, and we have no way of knowing at the start of her retirement which it is. If Mohini has picked a success ball, then Michael could choose to up his withdrawals as well. If Mohini has picked a failure ball, Michael is better off staying where he is. Since he has no way of knowing, he sticks with his current withdrawal rate. In a decade or so when it becomes clearer what the label is on his ball and on Mohini’s ball, he could well choose to reevaluate his position.


It is worth noting that if you pick a failure ball, this analogy breaks down. If you pick a failure ball, you can re-draw as many times as you please, you will never draw a success ball. If you’ve been unfortunate enough to pick a failure ball, the only way out of that scenario is to change the rules, and we talk about that below.


The Most Important Fact about the 4 Percent Rule


The most important thing to understand about the 4% (or 3.5% or whatever other number you choose) rule is that it is not, in point of fact, a rule. To quote the Trinity study:

“The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning.”

If, in the face of all evidence, one stubbornly keeps withdrawing an inflation adjusted 4% of a diminishing portfolio in a long bear market, perhaps one deserves to join the trolls who live under the bridge.

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17 thoughts on “Have you ever asked yourself: 4% of What?”

  1. Wow, this is very interesting food for thought ….. now to get to the $1,000,000 portfolio so I can make a choice …….

    1. There are other withdrawal strategies that increase your withdrawal as your porfolio size increases. They just happen to NOT be the withdrawal strategy chosen by the Trinity study. So I’m not saying that you can’t increase your withdrawals – just that you can’t increase them and use the results of the Trinity study to justify the increase.

  2. I’ve asked myself 4% of what so many times. Unfortunately it seems to keep coming back and saying I can’t count the house I live in. I like that house, it’s value is skyrocketing while I do nothing with it – 6% p/a for nothing is great. But I can’t eat my equity 🙂

    1. Yeah you definitely can’t count the house. The only way a house helps is that if it is paid off, then it reduces your ‘number’ by allowing to put in a smaller line item in your budget for housing expenses.

  3. And this is why Mrs. SSC hadn’t even considered what our SWR % rate was until 2 weeks ago when I asked her about it. It was easy enough to calculate since it was all in excel, but her response was “Who cares, it doesn’t mean anything. Some years we’ll be at 3% and some years we’ll be at 6% so what does it matter what the SWR is if the math on the spreadsheet works out.”

    Basically, her spreadsheet is like a cFiresim calculator and she plays around with things like what’s the projected ror on our investments, SS income or not, our needs pre yr against what our projected portfolio will be, and more stuff like that. Add in property tax assumptions, and random other things cFiresim doesn’t take into account and yeah, it very quickly turns into a “4% of what and why should I even care about 4%? It’s just a rule of thumb, and flexibility is a WAY better judge of how we will do rather than saying – but some study told me that this is the safe plan and SWR?”

    If we can be flexible and realize there may be lean years and we may have to find side income to supplement, if we’re willing to do that, then we should be golden. And how do you put that into retirement planning? We don’t, we plan for no income, increasing costs until we die, and see how that scenario plays out. When it gets to a level we’re comfortable with, then we’re set. Probably above and beyond set.

    It’s like you said, 4% of what? 🙂

    1. That spreadsheet sounds very interesting. Do you folks have a sanitized version of the spreadsheet shared somewhere? I’d love to take a look. I love spreadsheets in general, and am always on the lookout for new, better and cleverer ones to play with.

      1. We have this version out there – http://www.slowlysippingcoffee.com/our-excel-planning-worksheet-a-gift-for-you/

        But, it is more of a budgeting – how to meet your target, tracking money kind of sheet and isn’t as beefy as the one I recently saw. 🙂 Let me dig around and see if I can find one to send over. As the “non-keeper of the master sheet” I get screenshots of it, and I think it’s been emailed to me before, but I’ll have to check. Mostly, it’s “Don’t touch! Here are the numbers you’re looking for.” lol

  4. Your analogy doesn’t break down if you pick a failure ball. You can still re-draw and get a success ball. It’s just that it’s going to be at a lower spending rate that corresponds to your new balance. (assuming that the failure is due to an early drop in your portfolio balance, as it usually would be) Good visual image, btw.

    1. You are right. What I meant was that to recover from a failure ball you essentially have to change the game. You can’t play with the 4% withdrawal rate any more. The only way out is to change the rules and to pick a number that is lower than 4%.

  5. I’m pretty focused on other things right now but in the back of my mind we’ll be getting back on that retirement racehorse soon, so I’m caveatting right now that I haven’t delved deep into the numbers. That said – I always assumed that we were talking about, within Option 3, invested assets that aren’t contained in your 401(k) and other retirement vehicles that have early withdrawal penalties. How do you look at that?

    1. I count all invested assets. I don’t count the equity in the house, except in the scenario in which we sell the house and decide to rent for a while. Counting retirement assets makes sense to me because if I assume a 50-ish year long retirement, about 30 of those years I will have access to all my retirement accounts with no penalties – that is more than half of our retirement. So I’m shooting for a 3.5% withdrawal rate across all our accounts – taxable, Roth, 401k etc. – and I’m hoping to have our money distributed across these various accounts in a ratio that makes sense given our ages when we retire.

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