The Four Percent Rule for FIRE

The Four Percent Rule for FIRE

Understanding the 4 Percent Rule

Where the Rule Came From

US financial planner William Bengen tested historic returns back to 1926 and found that a retiree with a 50/50 mix of equities and bonds could withdraw 4% in the first year and still have money 30 years later in nearly every scenario. The approach is now known as the “4% rule” for retirement planning.

How It Works in Practice

  1. Calculate your FIRE number: spend $60 000 a year? Aim for 25 × $60 000 = $1.5 million.
  2. Year 1 of retirement: withdraw 4% of the $1.5 m ($60 000).
  3. Year 2 onwards: lift last year’s $60 000 by the previous year’s CPI. If CPI was 3%, draw $61 800.

The rule focuses on maintaining purchasing power, not sticking to 4% of the ever-changing balance.

Why the 4 Percent Rule Matters for New Zealand FIRE Seekers

NZ FactorImpact on the Rule
KiwiSaver lock-in (funds unavailable until 65)Early retirees need separate, flexible investments to bridge the gap.
High housing costsMortgage-free living lowers annual expenses, shrinking the “25 ×” target.
Variable inflation (CPI has averaged ≈ 2.8% over 20 years)Inflation adjustments can outpace term-deposit yields. Growth assets help offset this.
PIE tax regimeLower tax on NZ funds (top rate 28%) boosts net returns, but fees still matter.

Key Assumptions (& How to Check Them)

Portfolio Growth

  • Historical global share returns: ≈ 9 to 10% p.a.
  • NZ 10-year government bonds: ≈ 4% long-run average

Plan conservatively: model a 6 to 7% total return after fees and tax for a 60/40 mix.

Time Horizon

Retiring at 45 could mean 50+ years of withdrawals. Longer horizons push many Kiwis to lower the initial drawdown to 3 to 3.5% or adopt a flexible spending approach.

Asset Allocation

Age at RetirementSuggested Growth AllocationRationale
35 to 5070 to 75% sharesLong runway, inflation protection
50 to 6060 to 70% sharesBalance growth with lower volatility
60+50 to 60% sharesLess time to recover from large drops

Add global shares and bonds to reduce home-country bias and spread currency risk.

Fees and Taxes

A 1% annual fee can shave nearly 10 years off a 4% rule portfolio lasting 40 years. Choose:

  • NZX-listed index ETFs (fees ≈ 0.25  to  0.40%)
  • Low-cost managed funds (fees ≈ 0.50% or below)

Stress-Testing the Rule in a Kiwi Setting

Scenario60/40 Portfolio Life-Span
Historic average returns40 to 45 years
Returns 1% lower than historic32 to 35 years
GFC-style slump in first 5 years28 to 30 years
Drawdown reduced to 3.5%45 to 50 years

*Assumes 0.50% total fees, CPI 2.5%, annual rebalancing.

Take-away: The 4% rule survives most conditions, yet trimming to 3 to 3.5% or using a dynamic spending range boosts safety when retiring before 55.

Dynamic Withdrawal: A Safer Twist

  1. Set a floor (e.g. $48 000) and ceiling (e.g. $65 000).
  2. Withdraw the lesser of:
    • 4% of current balance, or
    • the ceiling, though never below the floor.
  3. Skip inflation raises in years when the portfolio falls 10%+.

Research shows this approach can lift success rates to 90% over 50-year horizons while allowing higher spending when markets roar.

Frequently Asked Kiwi Questions

Do I include KiwiSaver in my FIRE number?

Include it only for the post-65 phase. Build a separate “bridge” portfolio for the years prior.

How should I treat the family home?

Exclude the house from the 4% calculation unless you plan to downsize and invest the surplus.

What about health costs later in life?

Add a line item for medical insurance or self-funded care to your annual budget, then recalculate the 25× target.

Can I still carry a mortgage?

You can, but your annual repayment counts as an expense, lifting the size of the pot you need. Many aim to clear their mortgages first.

Action Plan

  1. Track 12 months of real spending to define your base number.
  2. Multiply by 25 (or 28 to 30 if aiming to retire at 45).
  3. Optimise fees: swap high-cost funds for low-fee index options.
  4. Review annually: cut spending by 5% when markets tumble.
  5. Seek professional advice to tailor asset mix, tax structure, and estate planning.

Build Your Personal Roadmap with Earnslaw Goodlight

Our Cambridge-based advisers craft strategies that:

  • Stress-test your 4% (or 3%) plan against multiple market paths.
  • Optimise KiwiSaver settings alongside taxable portfolios.
  • Model dynamic withdrawal ranges so your income can flex but never snaps.

Book a complimentary discovery call on 0800 827 827 or email info@earnslawgoodlight.co.nz and pave your way to financially secure, work-optional living.

Talk To Earnslaw Goodlight For More Advice On Early Retirement

The 4% rule is a time-tested tool, not a guarantee. Combine it with disciplined saving, diversified low-fee investment, and periodic reviews, and you give yourself the best possible odds of turning today’s dollars into decades of freedom.