4% Rule Guide

The 4% Rule and the Trinity Study

The most proven mathematical formula to calculate your financial freedom.

Pol Medina Financial Planner and Co-founder of Finturify • Updated on June 17, 2026

1. The Origin of the Trinity Study

The concept of "Financial Freedom" often sounds like a self-help idea, but it has very rigorous academic backing. In 1998, three finance professors from Trinity University (Texas) published a landmark study titled "Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable".

Their goal was to answer one of the most critical questions for any retiree: What percentage of my investment portfolio can I withdraw each year without the risk of running out of money before I die?

To do this, they simulated the historical performance of portfolios composed of US stocks and bonds over all possible 15- to 30-year periods between 1926 and 1995 (including economic disasters like the Great Depression of 1929 or the oil crises of the 1970s).

2. How Does the 4% Rule Work?

The study's conclusion was clear: a portfolio composed of 50% stocks or more has a historical success rate of 96% to 100% when withdrawing 4% in the first year and adjusting that amount in subsequent years solely for inflation.

The math to estimate your target capital is very simple (the inverse of 4% is multiplying by 25):

Target Capital = Annual Expenses × 25

Classic Asset Allocation (60/40) of the Trinity Study

For example, if you need $2,000 a month ($24,000 a year) to live comfortably, your target capital to achieve a safe retirement is $600,000 ($24,000 × 25).

In the first year of your financial freedom, you will withdraw exactly 4% of your $600,000 (which is $24,000). If the following year inflation rises by 3%, you will withdraw $24,720 ($24,000 + 3% inflation), regardless of whether the stock market has gone up or down that year. The Trinity Study demonstrated that the portfolio will withstand this withdrawal rate in virtually any scenario.

3. Safe Withdrawal Rate (SWR)

This initial 4% rate is known in financial jargon as SWR (Safe Withdrawal Rate). However, it is not a fixed rule set in stone. Depending on your risk tolerance and the estimated duration of your retirement, you can adjust this rate:

SWR of 3% to 3.5% (Ultra-conservative): Suitable if you plan to retire very young (e.g., at 35 or 40 years old) and need your money to last 50 or 60 years. The historical success rate is practically 100%.
SWR of 4% (Gold Standard): The ideal balance between accumulated capital and the likelihood of success over 30 years.
SWR greater than 5% (Aggressive): Carries a high risk of your portfolio depleting prematurely during prolonged bear markets, unless you have high spending flexibility.

4. The Sequence of Returns Risk

One of the greatest threats to early retirement is not the long-term average return, but the timing of when you start withdrawing your money. This is called the Sequence of Returns Risk.

If you retire and the stock market rises by 15% during the first 3 years, your portfolio will grow so much that future withdrawals will barely affect it. However, if you retire and the stock market drops by 20% at the start, you will be withdrawing money from a depleted portfolio. This accelerates the depletion of your capital, preventing you from benefiting from the subsequent market recovery.

Defensive strategy: To protect against this risk, many investors maintain a cash cushion equivalent to 1 or 2 years of expenses (emergency/safety buffer) or temporarily reduce their withdrawals during market downturns (flexible withdrawal).

5. Important Nuances for European and International Investors

The original Trinity Study was based entirely on historical data from US assets and currencies. When applying this rule outside the US (e.g., in Spain, Europe, or Latin America), we must take into account:

Capital Gains Taxes: In Spain and most European countries, capital gains (from funds, stocks) are taxed. The net capital required must be calculated keeping in mind that a portion of your withdrawals will go towards taxes.
Currency Risk: If you invest in global stock markets (which are mostly denominated in US dollars) but your daily living expenses are in Euros or other local currencies, your portfolio will be influenced by fluctuations in exchange rates (like EUR/USD).
Healthcare Costs: In Spain and Europe, universal public healthcare reduces the risk of catastrophic unexpected medical expenses, which is one of the leading causes of financial ruin in the US.

Frequently Asked Questions (FAQ)

What happens if my portfolio drops by half in a crisis?

The 4% rule accounts for these drops. During the Great Depression of 1929 or the Dotcom bubble of 2000, markets fell by more than 40%. Even so, the simulated portfolios in the study survived because stock prices recovered in the following years.

Do I have to liquidate my investments to withdraw the money?

Not all at once. If your portfolio consists of index funds, you will only sell the 4% needed for your expenses each year, leaving the remaining 96% growing in the market. If your portfolio generates dividends, you can use those cash payments to cover your expenses directly, reducing the need to sell shares.

Does the rule work if I don't want to leave an inheritance?

Yes. In fact, in 90% of the historical cases simulated in the Trinity Study, the accumulated capital after 30 years was much higher than the starting amount. Only in the worst historical scenarios did the portfolio end up near zero, meaning you will almost always end up leaving a significant inheritance to your heirs or charitable causes.

Pol Medina Co-founder

Pol Medina is an investment planner and co-founder of Finturify. He specializes in the passive index investing philosophy (Bogleheads) and the study of early retirement models (FIRE). He helps individual investors optimize the compound growth of their wealth by minimizing fees and avoiding behavioral mistakes.