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The 4% rule: the principle that inspired the FIRE movement
Would you like to one day live off your investments rather than your salary?
This is precisely the idea behind the famous 4% rule1.
Very popular with followers of the FIRE movement (Financial Independence, Retire Early), this rule allows us to estimate the capital needed to become financially independent.
But be warned: this is neither a magic formula nor a guarantee.
Let's see how it works.
What is the 4 % rule?
The 4 % rule comes from the Trinity Study, a study published in 1998 by three professors from Trinity University in the United States.
Researchers analyzed several decades of stock market data to answer a simple question:
What percentage can be withdrawn from one's portfolio each year without risking depleting it too quickly?
Their conclusion is as follows:
Historically, a portfolio composed mainly of US stocks had a high probability of lasting at least 25 years with an initial withdrawal of 4%, then withdrawals adjusted for inflation.
It was this conclusion that gave rise to the famous 4 % rule.
How does this rule work?
Let's imagine you own a wallet of 1,000,000 CHF invested in a US equity ETF (for example, an S&P500 ETF).
The first year, you remove:
1,000,000 × 4 % = 40,000 CHF
So you have 40,000 CHF to live during this first year.
In subsequent years, you continue to withdraw a similar amount, adjusted for inflation.
Meanwhile, your portfolio remains invested in the stock market. Companies continue to pay dividends, and the value of your investments can increase... or decrease depending on market performance.
The goal is therefore not to preserve exactly 1,000,000 CHF, but to ensure that your assets continue to generate sufficient returns to fund your withdrawals for several decades.
Let's take a concrete example.
Let's imagine your wallet gets:
an average annualized return of 8% per year
over the next 30 years
that you remove 4% per year.
In this scenario, your portfolio would generally continue to grow despite your withdrawals. After 30 years, it's even quite possible that it would be worth more than one million francs.
Conversely, if the markets go through several bad years right after you start your retirement, your portfolio could decline more rapidly.
👉 That's why the 4% rule doesn't try to predict the exact amount you'll have left in 30 years..It simply indicates that historically, a withdrawal of 4% offered a high probability that the portfolio would be stabilized after 30 years.
Example of the 4% rule with Artificial Intelligence?
I asked artificial intelligence to apply the 4% rule from 2010 to 2025 with an S&P500 ETF (ETF VOO).
An S&P 500 ETF is a collection of the 500 best-performing US stocks. According to the 4% rule, a portfolio composed of 100% US stocks has the best chance of being profitable.
Although artificial intelligence is not an infallible source, I wanted to analyze the calculation.
It should also be noted that I have considered the creation date of the S&P 500 VOO ETF (2010) up to December 31, 2025, i.e., approximately 15 years. The 4% rule is generally intended for a period of at least 25 years.
My question to the AI:
If a shareholder had invested USD 500,000 in the VOO ETF in September 2010 (date of creation of the ETF), reinvested the dividends, and withdrawn 4% annually from his portfolio, what amount would he have on December 31, 2025?
-> 1,650,000 USD
We see that in this example, the portfolio would have more than tripled despite a withdrawal of 4% each year.
However, this example is not an absolute rule. For instance, if the stock market shows very negative returns for three consecutive years in the future, the results will be very different from this example.
Why do we multiply our expenses by 25?
Calculating the 4% rule is very simple.
If you remove 4% of your assets each year, your capital must represent 25 years of spending.
In other words:
Capital required = Annual expenses × 25
For example :
Expenses of CHF 20,000/year → objective of 500,000 CHF
Expenses of 30,000 CHF/year → objective of 750,000 CHF
Expenses of 40,000 CHF/year → objective of 1,000,000 CHF
This amount is often called the Fire Number.
And if you wish, you can also calculate your FIRE Number based on your monthly expenses. Simply do the following:
Monthly expenses x 300
The result will be the same as annual expenses x 25.
How to apply the 4% rule per month?
Some financial experts argue that it is better to withdraw small amounts each month than to withdraw one large sum per year.
For example, if your goal is to withdraw 4% per year, you need to do a simple calculation:
4 : 12 months = 0.333% per month
Thus, to apply the 4% per month rule, you must withdraw 0.333% from your portfolio each month.
This would result in approximately 4% of withdrawal per year.
In my opinion, this option is preferable, because we are used to spending one salary per month.
In addition, some financiers claim that this option has a greater chance of growing the portfolio.
Is the 4 % rule reliable?
Yes… but with caution.
This rule is based on the historical performance of US financial markets.
However, no one can guarantee that the coming decades will resemble the previous ones.
It also assumes:
a well-diversified portfolio
a large proportion of shares
low investment costs
a retirement of approximately 30 years
So it's an excellent estimate, but certainly not a guarantee.
Should we use 4% today?
Many investors now prefer to be a little more cautious.
Instead of removing 4%, Some choose:
3,8%, to have a small safety margin
3,5%, when they wish to retire very early
In practice, the difference is small, but it allows for better resistance to long periods of market decline.
However, if US stock market performance is as good in the future as it was in the 2010-2025 period, a withdrawal of 4% is already sufficiently prudent.
Key takeaways from the 4% rule
The 4% rule does not predict the future.
It simply allows you to estimate a balance between withdrawal and growth in your stock portfolio.
It's an excellent tool for setting a financial goal, provided you remain flexible and don't consider that percentage as an absolute truth.
Ultimately, the 4 % rule does not answer the question:
" How much can I earn? ? »
It actually answers a different, much more interesting question:
" How much do I really need to be free? »
Conclusion The 4% Rule: The Golden Rule for Financial Independence
The 4 % rule is not a magic formula, nor a guarantee of success. It is above all a tool to estimate the capital needed to live off one's investments.
This is a very good calculation to determine the possible withdrawal rate that allows one to preserve assets over the long term.
This academic study reminds us of an essential idea: by investing regularly over the long term, it is possible to build up assets capable of gradually financing our lifestyle.
Should you withdraw 4% per year once you have acquired a good stock market portfolio? Not necessarily.
Some investors prefer to be more cautious and aim for 3.5% or 3.8% per year. And others, like me, think that 4% of annual withdrawals is already conservative enough.
Ultimately, the 4 % rule doesn't aim to predict the future. It primarily invites us to think differently: Rather than working our whole lives to earn money, why not build wealth that can work for us?
FAQ – The 4% Rule: The Golden Rule for Financial Independence
Does the 4% rule really work?
The 4% rule is based on historical data and the Trinity study. It is not a guarantee, but an estimate based on past performance of financial markets. Future returns may differ.
Why is there so much talk about the 4% rule in the FIRE movement?
Because it allows for a quick estimate of the capital needed to achieve financial independence. It has become a popular reference in the FIRE (Financial Independence, Retire Early) movement.
How do I calculate my FIRE target using the 4% rule?
The most well-known calculation involves multiplying your annual expenses by 25.
Example : 25,000 CHF of annual expenses × 25 = 625,000 CHF required.
Why multiply your expenses by 25?
Because an annual withdrawal of 4% mathematically corresponds to 1/25 of the portfolio. This formula simplifies the calculation of the target capital.
Does the 4% rule take inflation into account?
Not directly. That's why some investors prefer to use a more conservative rate, such as 3.5% to 3.8%, in order to incorporate an additional safety margin.
Is a 100% equity portfolio mandatory?
No. However, the Trinity study shows that portfolios heavily weighted in equities have historically performed better over the long term. On the other hand, they are also more volatile.
Can I use the 4% rule in Switzerland?
Yes, but the calculation must be adapted to Swiss taxation, the cost of living, insurance, the 2nd pillar, the AVS and your personal situation.
Is an S&P500 ETF sufficient to implement this strategy?
Yes. You simply need to use an ETF that replicates the S&P 500 to follow this rule.
What happens if the stock market falls after my retirement?
This is one of the main risks: a significant drop at the beginning of withdrawals can have a lasting impact on the portfolio. Some investors then temporarily reduce their spending or maintain a cash reserve.
4% or 3.8%: which rate should I choose?
The choice depends mainly on your level of risk tolerance. A lower rate generally increases the chances of preserving your capital for longer, but also requires a larger net worth.
Does the 4% rule guarantee that you will never run out of money?
No. No financial strategy can offer an absolute guarantee. The 4% rule should be used as an estimation tool, not as a certainty.
The 4% rule: The golden rule for financial independence
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