The 4% Rule: Its Origin, How It's Changed, and Its Link to Shiller CAPE

By Bob Lobclaw · August 2, 2026

The 4% rule says a retiree can withdraw 4% of their portfolio in the first year of retirement, then adjust that dollar amount for inflation every year after, with a high probability of not running out of money over a 30-year retirement. It’s become the default starting point for “how much can I safely spend” — and the “25x expenses” rule of thumb for how much you need to retire is just its reciprocal (1 ÷ 0.04 = 25).

Where it came from

The rule traces to a 1994 paper by William Bengen, a financial planner who wanted a better answer than the vague industry convention of the time, which was to assume a portfolio could support withdrawals equal to its long-run average return. Bengen pointed out that averages hide the sequence in which returns actually arrive, and a retiree who withdraws a fixed amount every year is much more exposed to a bad stretch early in retirement than the average return alone would suggest — the same idea explored in more depth in the sequence of returns risk article.

Instead of relying on averages, Bengen ran every 30-year retirement window in U.S. market history back to 1926 through a portfolio of 50% stocks and 50% intermediate-term bonds, and found the “worst case” starting point was a retiree beginning October 1, 1968 — right before a decade of bear markets and high inflation. Even that worst-case retiree could have withdrawn 4.15% in year one, adjusted for inflation thereafter, without exhausting the portfolio within 30 years. Bengen rounded down to 4% as a conservative, easy-to-remember figure.

The rule got its popular name a few years later from the 1998 “Trinity Study,” by three finance professors at Trinity University, who ran a similar historical analysis across different withdrawal rates, time horizons, and stock/bond allocations, and reported the rule as a table of historical success rates. The Trinity Study is what most people are actually citing when they mention the 4% rule, even though Bengen’s original paper came first.

How it’s changed since 1994

The 4% figure has never been a fixed law — it’s the output of a specific historical backtest, and every piece of that backtest has been revisited and challenged since:

Bengen himself raised it. In later work, after adding small-cap stocks to the mix and extending the dataset, Bengen suggested a “safe” rate closer to 4.5%–4.7% for a 30-year retirement with a more diversified portfolio — higher than the number that carries his name.
Longer retirements pull it down. The original 4% was calibrated to a 30-year horizon. Early retirees planning for 40–50+ years face more time for a bad sequence to compound, so the FIRE community generally targets lower rates, often 3.25%–3.75%. The FIRE calculator on this site defaults its safe withdrawal rate slider to that lower range for exactly this reason.
Fees eat into it. Bengen’s backtest assumed no investment costs. Real portfolios pay expense ratios and, often, advisory fees — a 1% annual fee doesn’t just cost 1% of returns, it can reduce a “safe” withdrawal rate by nearly a full percentage point over a multi-decade retirement.
Fixed withdrawals are now seen as the least efficient version of the idea. The 4% rule assumes a retiree never adjusts spending in response to how the portfolio is actually doing. Modern research generally favors some form of dynamic adjustment — the dynamic withdrawal strategies article covers guardrails, downturn-triggered cuts, and other rules that flex spending with markets, typically supporting a higher initial withdrawal than a rigid inflation-adjusted 4% would allow.
Valuations at retirement matter more than the rule admits. The original study treated every historical starting year identically, but later research found that how expensive the stock market is when someone retires meaningfully predicts how their withdrawal rate will hold up — which is where CAPE comes in.

Its relationship to Shiller CAPE

The Cyclically Adjusted Price-to-Earnings ratio (CAPE, or “Shiller P/E,” after Yale economist Robert Shiller) divides a stock index’s current price by the average of its inflation-adjusted earnings over the trailing 10 years, rather than a single year’s earnings. Averaging a full decade smooths out short-term earnings swings from recessions and booms, giving a steadier read on whether stocks are expensive or cheap relative to their own history.

CAPE matters to the 4% rule because a fixed 4% withdrawal rate implicitly assumes something close to average future market returns — and CAPE has historically been one of the better available predictors of long-run returns, precisely because it strips out the earnings-cycle noise a single-year P/E doesn’t. High CAPE readings at the start of retirement have historically preceded a decade or more of below-average stock returns; low CAPE readings have preceded above-average ones. Since a retirement that begins with weak returns is exactly the bad sequence Bengen’s original study was built to survive, researchers — notably Michael Kitces and Wade Pfau — have shown that starting CAPE level is a meaningfully better predictor of whether a given withdrawal rate will succeed than looking at history’s average outcome alone.

In practice, this has produced “CAPE-based” withdrawal rules: rather than a flat 4% for everyone, the safe starting rate is adjusted up or down based on where CAPE sits when retirement begins — a retiree starting out when the market is historically cheap (low CAPE) can reasonably plan on a higher initial withdrawal than 4%, while a retiree starting out when the market is historically expensive (high CAPE, as it has been for much of the 2010s and 2020s) is often advised to plan on something lower, closer to 3%–3.5%, to compensate for the weaker returns a high starting valuation has tended to foreshadow.

The bottom line

The 4% rule was never meant to be a universal guarantee — it’s the worst historical outcome from one specific backtest, using one specific portfolio mix, over one specific time horizon. It remains a genuinely useful starting point and a fast way to estimate a retirement number, but three decades of follow-up research have made the honest version more nuanced: the right rate depends on how long the retirement needs to last, what the portfolio actually holds, how willing the retiree is to adjust spending along the way, and, per CAPE-based research, how expensive the market happens to be on day one. Test how a 4% (or any other) withdrawal rate holds up against real historical sequences on the historical modeling page, or run it through thousands of simulated markets in the retirement calculator.

Educational content, not personalized financial advice — see the disclaimer.