Your FIRE Number and the Limits of the 4% Rule

Understand what the percentage means

The conventional rule starts with 4% of the portfolio in the first retirement year, then adjusts that dollar withdrawal for inflation. It is different from withdrawing 4% of the changing balance every year. Schwab describes the convention and its limitations in its withdrawal-rate explanation.

For example, a $1 million portfolio gives a $40,000 first-year withdrawal under the convention. If the assumed inflation adjustment is 3%, the next withdrawal is $41,200. It is not automatically $40,000 again, nor automatically 4% of the new market balance.

Calculate the spending the portfolio must cover

Build expected retirement spending rather than copying current salary. Include housing, health costs, transport, leisure, planned replacements, and estimated taxes on withdrawals. Remove expenses that genuinely end.

Subtract dependable nonportfolio income only for the years when it is expected to be available. If income begins later, model the earlier years separately. Do not subtract future benefits from every retirement year by default.

Worked example: $48,000 annual portfolio need

Assume $54,000 of spending and withdrawal-related taxes, less $6,000 of available outside income. The portfolio must supply $48,000 annually in this simplified example.

Lower assumed withdrawals require a larger initial portfolio for the same spending. The table does not assign success probabilities to any row.

Why the result is uncertain

A retirement starting with poor market returns can suffer more damage when withdrawals require selling assets from a reduced balance. Inflation can raise the needed dollar amount. Fees, taxes, portfolio allocation, retirement length, and spending flexibility also matter.

Investor.gov discusses the risk of running out of retirement money. A single average return cannot describe every withdrawal path.

An early retirement may need more years of funding than a conventional retirement example. Test a longer horizon instead of assuming the same withdrawal percentage automatically applies.

Use consistent dollar units

If the target uses today's spending, interpret the result in today's purchasing power. A future-value calculation using nominal investment returns also needs a future-dollar spending target. Mixing nominal returns with an unchanged present-day spending number can make progress look overstated.

Keep total net worth separate from the portfolio available to fund withdrawals. Home equity, business assets, and restricted cash require a realistic conversion or access plan before they can support spending.

Review the target when spending, expected outside income, or the retirement date changes. Use the net-worth guide for the balance-sheet snapshot, then identify the subset actually relevant to retirement funding.