Those interested in financial independence are likely familiar with the 4% rule. The rule comes from an influential 1998 study (the Trinity Study) that set out to determine safe withdrawal rates for retirees, but was later popularized by financial independence blogger, Mr. Money Moustache (aka Pete Adeney).
The idea of 4% rule is simple:
Assume the S&P 500 will return 7% – 10% on average each year over a long enough period of time (20+ years).
That means you could withdraw 4% of your S&P 500 stake, leaving remaining 96% to continue to grow. Theoretically you could continue to do this, every year, until the end of time.
To put it another way: imagine you have a money tree. You can pull 4% of the leaves off the tree each year and the tree will continue to grow and give you new leaves that you could then pull off in future. Be careful, if you pull too many leaves off your tree, the tree will die.
But what if 4% is too many leaves? What if the tree (stock market) doesn’t continue to grow at 7% – 10%? Then you’d be in big trouble.
That’s why I prefer the 3% rule. It leaves (no pun intended) more of a cushion in case things don’t go according to plan. Planning for the unknowns is important when you’re talking about making a decision as big as ending your career.
Ben Felix, portfolio manager at PWL Capital, has some interesting things to say about this topic:
The biggest insight I found in this video is that retirement spending should actually be considered variable and not fixed.
For example, some years you may need to withdraw 5%, but some years you may need to only withdraw 3% depending on your spending and income.
What the Research Says in 2026
Morningstar’s annual State of Retirement Income report, published in December 2025, put the safe starting withdrawal rate for 2026 retirees at 3.9%, up from 3.7% for 2025, based on forward-looking return assumptions, a 30-year horizon, a 90% success probability, and a portfolio with 30% to 50% in equities. Two details matter. First, the horizon drives the number: stretch the plan from 30 to 35 years and the safe rate falls to 3.5%. Second, flexibility is the real lever. Morningstar found that retirees willing to vary spending with market conditions can safely withdraw at rates approaching 6%. The fixed rule is a starting point, not a law.
So how much do I need to retire?
If you spend $40,000 a year, your FI number at a 3% withdrawal rate is $1,333,333 then you’ll need to have $1,333,333 invested if you plan on using the 3% withdrawal rate.
“But what happens if I decide to go with 3% instead of 4% and the stock market continues to return 4% – 7% each year?” My guess is you’d sleep better at night knowing you have more money than you actually need.
Fixed vs. Flexible: the Real Debate
The video’s central insight is the one the fixed-rule debate misses. Nobody actually spends the same inflation-adjusted amount for 30 straight years. Real retirees cut back after bad years and spend more after good ones, and the research says that behavior is worth more than picking 3% versus 4%. Guardrails strategies formalize it: set a base withdrawal, raise it when the portfolio runs hot, trim it when it runs cold. The rule gets you in the ballpark. Flexibility keeps you in the game.
This article is part of the Winchell House Original Articles series.
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