The 4% rule explained: definition and 25× math
An initial withdrawal, then an indexed amount
With a hypothetical initial $1,000,000 portfolio, 4% is $40,000 in year one. If the next inflation adjustment is assumed to be 2%, the withdrawal becomes $40,800. It is not automatically reset to 4% of the remaining balance.
Withdrawing a percentage of the current balance is a different method. Income moves with the portfolio and may become very small: it is not insurance of a minimum income or preservation of capital.
Why 25 times the annual withdrawal?
1 ÷ 0.04 = 25. Illustrative capital is therefore the initial annual withdrawal divided by 4%. The amount comes out of the portfolio; it is not necessarily after-tax spending money.
| Hypothetical initial withdrawal | Capital at 4% |
|---|---|
| $40,000 | $1,000,000 |
| $60,000 | $1,500,000 |
| $80,000 | $2,000,000 |
Canadian-dollar examples; arithmetic only, not validation of a duration or a personal withdrawal rate.
Where does the number come from?
Bengen (1994) analyzes historical U.S. portfolios. The Trinity study (1998) then tests different allocations and horizons, including 30 years. Past results are not a future guarantee for Canadian investors.
What this shortcut leaves out
- Pensions: use your CPP or QPP and OAS estimates and their start dates. Do not add two maximum CPP and QPP pensions for the same career.
- Tax: RRSP/RRIF withdrawals are generally taxable; TFSA withdrawals are generally tax-free. One uniform tax gross-up does not fit everyone.
- Markets: return order, fees and inflation change the result.
- Duration: 30 years and 50 years are different scenarios. This article sets no age-based recommended rate.
Constant purchasing-power withdrawals and flexible spending are different strategies. The rule helps explain a rough scale; it does not determine when an individual can stop working.
The next step
The detailed guide provides dated official references and a method to separate net spending, gross withdrawals and pensions. To explore the product without your data, open the WealthWise demo. Demonstration data is not a forecast.
Arithmetic capital calculator
An entered rate is an assumption, not a recommended rate. No returns, tax, fees or pensions are simulated.
Theoretical benchmark only — no required capital or sustainable income is established.
Frequently asked questions
What does the 4% rule mean?
It is a historical benchmark: withdraw 4% of the initial portfolio in year one, then adjust that dollar amount for inflation. It is neither a promised return nor an income guarantee.
Why multiply by 25?
Because 1 ÷ 0.04 = 25. A hypothetical initial withdrawal of $40,000 therefore corresponds to $1,000,000 of capital at 4%, before personal tax and income adjustments.
Is the rule validated for every Canadian?
No. The original research uses U.S. data and specific assumptions. Canadian planning must distinguish pensions, accounts, taxes, fees and retirement duration.
Sources and review scope
- Bengen (1994) — original research (PDF)
- Cooley, Hubbard & Walz (1998) — Trinity study
- Service Canada — CPP monthly payment amounts
- Retraite Québec — QPP figures
- Service Canada — OAS payment amounts
- CRA — how TFSAs work
- Service Canada — CPP–QPP coordination
Full article reviewed and sources consulted October 19, 2026. The studies are historical; benefit amounts apply only to their stated periods. Check current data and your individual record before making a decision.