What is the 4% rule? Does it really work?

When thinking about retirement, many people feel worried and alarmed. After all, how much money do we need to live comfortably without relying on income from work? This is where long-term financial planning comes into play, although it has always been surrounded by uncertainty. Why? Because questions like “how much money do I need to live without working?” or “how do I know if my savings are enough to maintain my lifestyle?” come to mind.

In this context, the 4% rule emerges, but what exactly is it? It's known as a method used to calculate how much capital needs to be accumulated in order to live off investments. However, how accurate is this rule? Does it still hold up in 2025?

At Inversa, we want you to have all the information you need, so we provide you with the key points to understand this famous formula and the ways you can apply it to your financial strategy.

What is the 4% rule?

The 4% rule is a formula designed to manage money effectively during retirement. It helps calculate how long your savings can last if you withdraw a portion each year. It also takes into account the returns generated by your assets.

According to this rule, upon retirement, you can withdraw 4% of your invested wealth each year, adjusting the amount for inflation, without depleting your capital for at least 30 years.

Let’s look at a practical example. Suppose you've accumulated 500,000 euros—this would allow you to withdraw 20,000 euros in the first year. You would continue this way, updating the amount according to inflation.

This rule gained popularity after the 1998 “Trinity Study”, conducted by three professors at Trinity University. They analyzed historical U.S. market data and concluded that a 4% annual withdrawal was sustainable in most scenarios.

How is the 4% rule calculated?

It’s a simple calculation. Just multiply the total amount saved for retirement by 0.04. In this way, you get an approximate figure of the money you can safely withdraw each year. The formula looks like this:

• Accumulated capital x 0.04 = Annual withdrawal

Let’s go through another practical example. Imagine your goal is to withdraw 30,000 euros per year. In that case, you would need to accumulate 750,000 euros, as you can see by dividing 30,000 by 0.04 (30,000 ÷ 0.04).

This method has become a benchmark for those aiming to achieve financial independence, which we define precisely in our article about what financial freedom is and how to achieve it.

Does the 4% rule still work today?

The rule has undergone modifications and adjustments over the years, but in general, it has remained relatively stable and achievable. Of course, it’s important to consider that its effectiveness depends on each person’s financial situation and other factors:

1. Low-yield environments – For years, low interest rates have reduced returns on traditional assets like bonds. Therefore, it may be more difficult to replicate the historical returns on which the Trinity Study was based, although not impossible.


2. Increased life expectancy – Longevity forecasts have improved significantly. This creates a gap with the original rule, which was based on 30 years of retirement, whereas nowadays it’s not uncommon to plan for 35 to 40 years.


3. More volatile markets – Globalization and interconnected markets make economic cycles more unpredictable. Relying on a fixed percentage can be risky.

Alternatives to the 4% rule and ways to adapt it

Although there are factors that may make success more difficult, as we’ve pointed out, it’s not impossible. There’s no need to discard the rule—rather, it’s advisable to adapt it to your personal situation and economic context:

• The 3.5% or 3% rule – More conservative adaptations, considering increased longevity and lower expected returns.


• Flexible withdrawals – Adjust the amount withdrawn based on your portfolio’s actual performance, reducing withdrawals in bad years or skipping some months altogether.


• Diversified investments – Combining stocks, bonds, and alternatives like crowdlending allows for higher returns with risk control. You can read more in our article on how to generate passive income through crowdlending.

Tips to apply the 4% rule wisely

Instead of blindly following it, at Inversa we recommend these simple steps:

• Use it as an initial reference point.


• Run personalized simulations based on your goals, assets, and risk profile.


• Diversify your income sources. Choose dividends, crowdlending, Treasury bonds, etc.


• Monitor and adjust the strategy every 1 or 2 years.


• Maintain a liquidity cushion to deal with unexpected expenses without having to sell assets at a loss.

Is the 4% rule right for you?

The key is to understand that there is no universal formula suitable for everyone. The 4% rule is a great starting point for planning, but it should always be adapted to your situation, time horizon, and risk tolerance.

At Inversa, we’re ready to help you complement your financial independence strategy with alternative and diversified investment tools, such as crowdlending. These tools allow you to achieve returns with controlled risk and defined timeframes. If you want more information, don’t hesitate to contact us.