How much can you safely withdraw from your investment portfolio?

A liquid investment portfolio can eventually give you the freedom to withdraw some of your wealth when you need it. That wealth can then help fund your life.

Once withdrawals begin, however, a difficult balance appears.

Withdraw too much and the portfolio may run out too quickly. Withdraw much less than necessary out of caution and you may give up part of the standard of living you built the portfolio to support.

How much can we withdraw from an investment portfolio while still giving it a reasonable chance of lasting for as long as we need it?

The 4% rule is one historical attempt to turn that difficult question into a useful planning framework. It is not simply ‘the answer’.

The 4% rule does not mean withdrawing 4% of the portfolio’s current value every year.

You begin with the value of the portfolio at the start. In the first year, you withdraw 4% of that initial value. You then increase the euro amount each year with inflation so that its purchasing power remains roughly stable.

In 1994, financial planner William P. Bengen published Determining Withdrawal Rates Using Historical Data in the Journal of Financial Planning.

His important contribution was to look beyond one long-term average return. He examined what actually happened when historical returns were experienced year by year in their original order.

This brings us to sequence-of-returns risk. Two investors can experience a similar average return over a long period and still end with very different outcomes. Someone who faces steep market declines early in the withdrawal period while also taking money out has less capital left to benefit from a later recovery.

An average alone therefore cannot tell us whether a withdrawal plan will hold up. The order in which strong and weak years arrive matters just as much.

In the historical scenarios Bengen examined, an initial withdrawal of roughly 4%, followed by inflation adjustments, lasted for at least about thirty years. That was a result within his historical dataset and assumptions, not a guarantee for every future period.

Four years later, Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz published Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable.

The three authors were finance professors at Trinity University in San Antonio, Texas. ‘Trinity Study’ is an informal name referring to their university, not the official title of the paper.

The researchers used U.S. market data from 1926 through 1995. They tested withdrawal rates from 3% to 12% over payout periods of 15, 20, 25 and 30 years.

They compared five portfolio allocations:

• 100% stocks;
• 75% stocks and 25% bonds;
• 50% stocks and 50% bonds;
• 25% stocks and 75% bonds;
• 100% bonds.

The S&P 500 represented stocks. For bonds, the researchers used long-term, high-grade U.S. corporate bonds.

They did not calculate with one average yearly return. Instead, they replayed historical returns year by year in overlapping periods. A thirty-year test might start in 1926, the next in 1927, then 1928, and so on. Within the 1926–1995 dataset, this produced 41 overlapping thirty-year periods.

This preserved the actual order of returns. A sharp market decline at the beginning of a withdrawal period could therefore have a different effect from the same decline near the end.

A historical period counted as successful when the portfolio still had a value greater than zero at the end of the selected payout period.

The historical success rate is therefore the percentage of the periods examined in which the portfolio was not completely depleted.

The actual table in the Trinity Study contains withdrawal rates from 3% through 12%. The visualization below focuses on 3%, 4%, 5% and 6%. This keeps the main pattern readable: lower withdrawals were historically more robust, longer periods made higher withdrawals harder to sustain, and the portfolio allocation also affected the outcome.

A concrete example

In the first allocation, look at the combination of 4% and thirty years. Of the overlapping thirty-year periods examined, 95% ended with money still in the portfolio when someone started with a portfolio made up entirely of S&P 500 stocks, withdrew 4% of the initial value in the first year and then adjusted that amount annually for inflation.

With 75% stocks and 25% bonds, the historical success rate was 98%. With a 50/50 allocation, it was 95%.

This does not prove that a 75/25 portfolio is ‘better’ today. It mainly shows that the assumptions and portfolio allocation affect the historical result.

A portfolio with almost nothing left and one with substantial wealth remaining both counted as successful. The success rate does not tell us how comfortable the journey was, how far the portfolio fell along the way or how much remained at the end.

A plan can succeed in a spreadsheet and still feel extremely difficult in practice. A single ending percentage also tells us nothing about whether someone would have remained invested through severe market declines.

The success-rate table only tells us whether a portfolio survived the selected period. The Trinity Study also looked at the ending value after all annual withdrawals. Outcomes varied enormously depending on the starting period.

A concrete example

With the default selection — 75% stocks, 25% bonds, twenty years and a fixed annual withdrawal of 7% — the average historical ending value was $2,435 and the median was $2,076. The spread matters more: the same $1,000 starting portfolio and the same withdrawal plan ended with anything from nothing to more than $7,000, depending on the starting period.

That difference illustrates sequence-of-returns risk once again. The maximum ending value of $7,047 is a historical outcome within this study, not a forecast for a modern portfolio.

1. The study uses U.S. market data

Stocks in the study are represented by the S&P 500. That is not the same as a modern globally diversified ETF following, for example, the MSCI World, FTSE All-World or MSCI ACWI. The historical U.S. outcomes cannot be transferred directly to a global ETF.

2. The historical data end in 1995

The original Trinity Study was published in 1998 and used returns from 1926 through 1995. Economies and financial markets have since experienced many other conditions. The research remains valuable historical context, but it is not a prediction for today’s market.

3. The longest period tested was thirty years

This matters when thinking about financial independence rather than only a traditional retirement. Someone becoming financially independent at 40 may need a portfolio to last for forty, fifty or more years. The original Trinity Study did not test such periods.

Over a very long horizon, 4% is therefore even more clearly a planning assumption rather than a promise.

4. Taxes and transaction costs are excluded

The researchers did not account for taxes or transaction costs. What someone can actually withdraw also depends on those costs and on their personal tax circumstances.

5. Historical survival is not future certainty

The future may contain return sequences or economic conditions that do not appear in this historical sample. That does not make the research worthless, but it does determine how cautiously its results should be described.

The 4% rule has one particularly useful quality: it quickly makes an abstract goal more tangible.

Someone who wants to fund €24,000 per year arrives at €600,000 using this simple relationship.

This does not guarantee that €600,000 can finance €24,000 per year forever. It is simply the portfolio value that mathematically corresponds to an initial withdrawal of 4%.

That is why the Rootree Simulator uses the rule as a point of orientation. It helps you see how your annual spending relates to a possible target portfolio without pretending to know the future.

The 4% rule helps turn an abstract idea such as financial independence into a concrete number. It is built on historical research and also has meaningful limitations.

A real financial plan does not have to remain unchanged for thirty years. Spending can be adjusted, income can change and the plan can be reviewed along the way.

The important thing is not to trust the number blindly, but to understand the assumption behind it. A sound financial plan does not need to predict the future perfectly. It should mainly help you understand the direction you want to take today.

If you first want to understand how to begin investing calmly and with broad diversification, The practical guide brings the essentials together in one step-by-step story.