How to Calculate Retirement Withdrawals: The 4% Rule

What a retirement withdrawal really is

A retirement withdrawal is the money you take out of your savings each year to live on once you stop working. The question is not only how much you can take in the first year, but how long the pot lasts when each year's withdrawal grows with inflation and the money left behind keeps earning a return. This guide works the whole calculation through on one example: $1,000,000 saved, a 4% first-year withdrawal rate, a 6% expected return, and 3% inflation, over 30 years. Every figure is checked against the retirement withdrawal calculator. The rule behind it is the 4% rule: withdraw 4% of the starting balance in the first year, then raise the amount by inflation each year after, and see whether the balance survives.

Step 1: Add up your retirement savings

Start by adding up everything you have saved for retirement: your 401(k), your IRA, any taxable investment accounts, and cash set aside for retirement. Do not count the value of your home unless you genuinely plan to sell it and live on the proceeds, and do not count money you will need for a one-off cost, such as paying off a mortgage. The total is the balance the calculation starts from, and in this guide's example it is $1,000,000. A smaller starting balance changes everything downstream: the first-year withdrawal, the monthly income, and the year the money runs out all scale with it.

Step 2: Pick your first-year withdrawal rate

The first-year withdrawal rate is the percentage of the starting balance you take out in year one. The 4% rule uses 4%, a figure drawn from studies of how long a balanced portfolio lasted across decades of market history. It is a rule of thumb, not a guarantee, and it is a starting point, not a law: a lower rate makes the money last longer, a higher rate spends it faster. On the $1,000,000 example, a 3% rate never runs out within 100 years, while a 5% rate runs the money out in year 32. Pick the rate that matches how long you need the money to last and how much risk you can live with, then hold it fixed for the rest of the calculation.

Step 3: Work out the first-year withdrawal in dollars

Turn the rate into dollars. Multiply the starting balance by the first-year rate: $1,000,000 times 4% is $40,000 for the first year. Divide by 12 to get the monthly figure: $40,000 divided by 12 is $3,333.33 a month. That is the income the 4% rule gives you in year one, before tax. If your balance were $500,000 instead, the same 4% would give $20,000 a year, or $1,666.67 a month; on $2,000,000 it would give $80,000 a year, or $6,666.67 a month. The rate stays the same; only the balance changes the dollars.

Step 4: Grow each year's withdrawal with inflation

Each year's withdrawal is bigger than the last, because prices rise. The year-two withdrawal is the first-year withdrawal grown by inflation: $40,000 times 1.03 is $41,200. In general, the year-t withdrawal is the first-year withdrawal times (1 + inflation) raised to the power t minus 1. On this example the withdrawal reaches $45,020.35 in year 5, $52,190.93 in year 10, $70,140.24 in year 20, and $94,262.62 in year 30. That last figure is the point most people miss: after 30 years of 3% inflation, you need more than twice the first-year amount to buy the same things.

Step 5: Grow the remaining balance with investment returns

While withdrawals grow, the balance left behind grows too. Each year the balance first earns the expected return, and the withdrawal comes out at year-end, after that growth: end-of-year balance equals last year's balance times (1 + return) minus this year's withdrawal. On the example, 6% growth beats the 4% withdrawal and the 3% inflation drag, so the balance keeps rising: after 30 years it stands at $1,321,852.90, more than the $1,000,000 you started with, and the total withdrawn over those 30 years is $1,903,016.63. Note that totals are computed from unrounded values, so rounded parts may differ by a cent from their rounded sum.

Step 6: Check how long the money lasts

Finally, keep the simulation running past the 30-year plan and find the year the money cannot pay the full withdrawal. On the example the money runs out in year 49, with a shortfall of $117,542.10 that year — it pays 48 full years. Retire at 65 and it would carry you past 110. The answer is sensitive to the inputs, though. If the return is only 4% instead of 6%, the money runs out in year 30, short by $21,142.65, so the 30-year plan fails in its last year. If inflation is 5% instead of 3%, the ending balance after 30 years is only $57,295.98 and the money runs out in year 31. Two reverses sharpen the picture: the withdrawal rate that makes the money run out exactly at year 30 is 5.20% (exact 5.1958%), while at 5.19% the money lasts with $6,415.52 left; and the balance needed for a fixed $40,000 a year to last 40 years is $910,476.73.

What the calculation leaves out

The calculation leaves out four real things. Taxes are not included: withdrawals from a traditional IRA or 401(k) are taxable income, so the $40,000 a year is before tax, not what lands in your bank account. Real returns are not flat: the model uses one 6% return every year, but real markets swing, and a bad run early in retirement hurts far more than the same bad run later. Fees are not included: fund fees and adviser fees come out of the same balance. And the model assumes you stay invested the whole time, through every downturn. Once you reach 73, withdrawals stop being a choice: the RMD calculator works out the required minimum distribution you must take each year.

What to do next

Run your own balance, rate, return, and inflation through the retirement withdrawal calculator and read the answers in order: first-year withdrawal, monthly income, ending balance, and the year the money runs out. Then try the two stress tests: drop the return to 4% and raise inflation to 5%, and see whether the plan still lasts. If it does not, change one thing at a time — a lower withdrawal rate, a later retirement, or a bigger starting balance.