The 4% rule in Canada: how much you need to retire

1. Where the 4% rule comes from: Bengen and the Trinity study

In 1994, American financial planner William Bengen asked a new question: not "what average return should I expect?" but "what percentage could a retiree have withdrawn every year without ever running out of money, even in the worst stretches of history?" He back-tested every possible retirement start date since 1926 — including 1929, 1937 and 1966 — using a portfolio of 50% to 75% U.S. stocks.

His finding: an initial withdrawal of 4% of the portfolio, then adjusted for inflation every year, would have lasted at least 30 years in every single case. In 1998, three Trinity University professors (the Trinity study) confirmed it: across all 30-year periods from 1926 to 1995, a 50/50 stock-bond portfolio with inflation-adjusted 4% withdrawals succeeded about 95% of the time — closer to 98% with 75% stocks.

The core logic: you don't plan around the average — you plan around the worst historical sequences. The 4% is a safe withdrawal rate (SWR), not an expected return.

2. The 25x rule: multiply your spending by 25

Mathematically, 4% = 1/25. So:

Target capital = annual spending × 25

• $30,000/year in spending → $750,000
• $40,000/year in spending → $1,000,000
• $60,000/year in spending → $1,500,000

Two key details. First, it's your spending, not your income: in retirement there are no more RRSP contributions, often no more mortgage, and no work-related costs. Second, the exact mechanics: you withdraw 4% of the starting portfolio in year one only, then index that dollar amount to inflation — you do not recalculate 4% of the balance each year. This is the math at the heart of the FIRE movement in Canada, where the 4% rule is the cornerstone.

3. Table: from annual spending to your target number

Three scenarios depending on the withdrawal rate you choose (inflation-adjusted withdrawals, pre-tax, no government benefits):

4. The Canadian adjustment: CPP/QPP and OAS shrink the bill

The Trinity study assumes your portfolio funds 100% of your spending. In Canada that's rarely true: from age 65, Old Age Security (OAS) pays roughly $8,900/year (ages 65–74, indexed quarterly, clawed back above roughly $95,000 of net income), and CPP — or QPP in Quebec — can reach about $17,500/year at 65 for someone who contributed at the maximum for a full career. The average pension actually paid runs closer to $9,000–$10,000/year. You can start CPP/QPP as early as 60 (reduced) or defer it (enhanced).

The proper Canadian method:

1. Subtract your expected benefits from your annual spending;
2. Multiply the remainder by 25 — that's what your portfolio must cover from age 65 onward;
3. If you retire before 65, add a "bridge": the portfolio covers 100% of spending between your exit and the start of benefits.

That two-phase math is exactly what our detailed FIRE calculator does — it models the bridge years before 65 and the benefit-supported phase after.

5. Drawdown taxes: RRSP is taxable, TFSA is free

The rule's second blind spot: it ignores tax. In Canada, the tax treatment of withdrawals varies enormously by account:

• RRSP / RRIF: every withdrawal is added to your taxable income (and the RRSP must convert to a RRIF by the end of the year you turn 71, with mandatory minimum withdrawals). Your spending is net; your withdrawals are gross.
• TFSA: withdrawals are 100% tax-free and never affect OAS or GIS. With cumulative room of about $109,000 in 2026 (estimate based on CRA indexation) per person, it's a major drawdown lever.
• Non-registered: capital gains taxed at a 50% inclusion rate; eligible Canadian dividends get the dividend tax credit.

The practical consequence: if your million sits entirely in an RRSP, your target has to absorb the tax. As an illustration, clearing $40,000 net in Quebec takes roughly $46,000–$48,000 in gross RRSP withdrawals (an effective rate of about 14%–16%, before the age and pension income credits). A well-balanced RRSP/TFSA mix can move your real target — sometimes by more than $100,000.

6. Worked Quebec example: $40,000 in spending → $1M… really?

Profile: single person in Quebec, spending $40,000/year (net), aiming to retire at 60.

• Raw rule: 40,000 × 25 = $1,000,000.
• Refinement 1 — benefits: at 65, QPP + OAS ≈ $18,000/year (average amounts, as a rough guide). Residual spending: $22,000 → 22,000 × 25 = $550,000 is enough for the post-65 phase.
• Refinement 2 — the 60–65 bridge: five years at $40,000 ≈ an extra $200,000 (simplified, ignoring returns during the bridge). Total target ≈ $750,000 rather than $1M.
• Refinement 3 — taxes: if everything comes out of an RRSP, gross up withdrawals by about 10%–15% to cover tax → the target climbs back to $820,000–$850,000. With a healthy TFSA share, it stays near $750,000.

Bottom line: the real answer sits between $550,000 and $1M depending on your retirement age, your CPP/QPP contribution history and the RRSP/TFSA split of your savings. "Multiply by 25" is the starting point, not the final answer.

7. The limits of the 4% rule

• Sequence of returns: two retirees with the same average return but reversed order get opposite outcomes. A bear market in the first 5–10 years can derail the plan — we cover the defences in our guide to sequence-of-returns risk.
• Inflation: the rule indexes withdrawals, but prolonged high inflation combined with a bear market (the 1970s scenario, nearly revisited in 2022 when Canadian CPI ran around 6.8%) is the worst case.
• The 30-year horizon: Trinity stops at 30 years. Retiring at 45 means 45–50 years of drawdown — 4% becomes optimistic.
• Fees: the study assumes near-zero costs. Every 1% in annual management fees cuts your truly sustainable withdrawal rate by about as much — hence low-cost index ETFs.
• U.S. data: 20th-century American markets were among the best-performing in the world. Be careful extrapolating blindly.

8. The variants: a cautious 3.5%, a flexible 4.5%

3.5% (×28.6): the long-retirement choice. If you're out before 50 or want a near-perpetual portfolio, aim for 3.25%–3.5%: on $40,000 of spending, about $1,143,000.

4.5% (×22.2): Bengen himself later raised his estimate to around 4.5%–4.7% with a more diversified portfolio (adding small caps). Reasonable for a retirement starting at 65 or later, especially with CPP/QPP and OAS as a backstop and some flexibility: cutting withdrawals in bad years (the guardrails method) markedly improves success rates.

The same math powers every flavour of FIRE — only the spending level changes: see our comparison of Coast FIRE, Lean FIRE and Fat FIRE in Canada.

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