The 4% rule: how much can you safely spend from a portfolio?

Q: What’s ‘sequence-of-returns risk’ in plain terms?

It’s the outsized damage from a market crash in the early years of spending down a portfolio. Selling into a deep dip when the pot is largest can leave a dent it never recovers from — even if average returns later look fine. Being willing to spend a little less in bad years is the common cushion.

Part of Portfolios & strategies

Once you’ve built a pot, a new question appears: how much can you actually spend from it each year without it running dry? The 4% rule is the most famous rough answer — and the most misunderstood.

The rule in one sentence

Here it is: in your first year of drawing on a portfolio, you take out about 4% of its value; in every year after, you take the same euro amount adjusted up for inflation, ignoring what the market did. So a €500,000 pot would start at roughly €20,000 in year one, then that figure creeps up with prices. The appeal is its simplicity — one number that turns a terrifying question into something you can plan around.

Where it comes from — and its limits

The 4% figure came from studies of past market history, largely in the United States, asking what withdrawal rate would have survived the worst stretches. That makes it a well-researched starting point, not a law of nature. Different countries, different eras, higher fees, longer retirements and today’s starting conditions can all push the ‘safe’ number a bit higher or lower. Treat 4% as a sensible anchor to reason from, not a precise promise your money will last.

The risk it hides: sequence of returns

Here’s the subtle danger. A big market fall early in your drawdown does far more damage than the same fall later, because you’re selling units into weakness right when the pot is largest and has the longest way to go — it may never fully recover. This is ‘sequence-of-returns risk’, and it’s why two people with identical average returns can end up worlds apart. The usual defence is flexibility: trimming spending a little in bad takes a lot of the sting out.

The handy flip side for savers

The rule has a bonus use before retirement. Turn 4% upside down (divide by 0.04, or just multiply by 25) and you get a rough target: about 25× your annual spending. Want €20,000 a year from your portfolio one day? The ballpark pot is around €500,000. It’s a back-of-an-envelope direction of travel, not a guaranteed finish line — but it turns ‘enough to retire’ from a mystery into a number you can aim at. All of this is educational background, not a withdrawal or savings recommendation.

Common questions

Is the 4% rule safe to rely on?

It’s a reasonable anchor, not a certainty. It came from historical data, leans on US markets, and assumes a roughly 30-year horizon — so longer retirements, higher fees, or a rough start can change the picture. Most people treat it as a starting figure and stay flexible rather than following it blindly. This is background, not advice.

What’s ‘sequence-of-returns risk’ in plain terms?

It’s the outsized damage from a market crash in the early years of spending down a portfolio. Selling into a deep dip when the pot is largest can leave a dent it never recovers from — even if average returns later look fine. Being willing to spend a little less in bad years is the common cushion.