For at least a decade, financial gurus have relied on the 4% rule. It has been considered a safe rate to withdraw from your retirement nest egg so you won’t run out of money in retirement.

For example, if you have a million dollars in that nest egg, you can withdraw $40,000 (4%) a year.

Sounds great right?

Let’s get into the weeds.

That link above explains that it was 5% before the 1990s. Recent research shows that the number might be closer to 3.5%. So should you withdraw $35,000, $40,000 or $50,000? That’s kind of big difference right?

You might ask, “Where do these numbers even come from?” I always presumed (and still do) that it’s an assumed rate of return, such as 7%, minus inflation, typically around 3%. Before 1990 you would have been able to get a higher rate of return in interest from banks. Today, you get almost nothing.

The question I have is, “How long should that nest egg last at whatever the ‘correct’ rate is?”

I read this article on CNBC that says it should last 30 years. That’s a good thing. We typically think of retirement starting at 65. Being financially covered until age 95 is great. I don’t know too many who think, “What am I going to do at 96?”

However, let’s think about where that 30 years comes from. If we had a mattress made out out of million dollars (it’s too much to stuff under), it would last for 25 years by simply drawing down 4%. If we went with the rule of 3.5% we’d get by 28.5 years… guaranteed.

That’s earning 0% interest… for 25 to 28.5 years. It feels like we should be able to do better than that, right?

We could go with these investing income ideas. Some combination that would yield a positive return over 25-28 years, right?

So what happens if you were to retire at age 35 or 40 and have to fund 45 or 50 years of retirement?

How long should we be able to last by withdrawing an amount of 3.5-4%? Mathematically it would last indefinitely if you are able to invest the remaining portion at the same 4%. In practice, you’ll probably have some money earning 0% in a bank account. That would most likely be balanced by having some money earning the 7-8% long-term rate in the stock market.

A Bloomberg article featuring of two of my favorite financial independence gurus tackles this question.

It begins with the assumption that the 4% rule doesn’t apply to those retiring early. The author brings in an expert opinion:

“If you retire at 40 with a couple million dollars, you’re going to worry—about financial emergencies, taxes, inflation, market crashes, and the chance you’ll live a lot longer than you’d planned for,” says Robert Karn, an adviser with Karn Couzens & Associates in Farmington, Conn.

Inflation is a legitimate concern. A market crash could be a legitimate concern, but someone retiring at age 40 with 2 million dollars probably is smart enough to take a long-term view. I’m not sure if taxes are a legitimate concern, because they aren’t exactly a surprise. Taxes tend to be fairly consistent. The biggest tax is income tax, and when you are retired, you typically don’t have a lot of income.

As for the chance you’ll live longer than you planned for, 2 million dollars is enough to last for 50 years (until a person reaches 90) if someone withdraws $40,000 a year. That’s if the money made zero interest during that time.

The Bloomberg article does a great job profiling 3 people who illustrate how early retirement works in practice. These people are very intelligent and very diligent with their money. They aren’t the average Joe.

I think it’s time we look at the 4% rule in more detail. It seems like the 4 number itself depends greatly on the person’s expected spending, asset allocation, and inflation. It’s a nice easy estimate, but I don’t think people should make absolute statements without knowing those details. The website Ten Factorial Rocks writes about the safest withdrawal rate. I promise you his answer isn’t zero like mine would be.

What do you think? Let me know in the comments.