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
- Calculate your FIRE number: spend $60 000 a year? Aim for 25 × $60 000 = $1.5 million.
- Year 1 of retirement: withdraw 4% of the $1.5 m ($60 000).
- 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 Factor | Impact on the Rule |
---|---|
KiwiSaver lock-in (funds unavailable until 65) | Early retirees need separate, flexible investments to bridge the gap. |
High housing costs | Mortgage-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 regime | Lower 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 Retirement | Suggested Growth Allocation | Rationale |
---|---|---|
35 to 50 | 70 to 75% shares | Long runway, inflation protection |
50 to 60 | 60 to 70% shares | Balance growth with lower volatility |
60+ | 50 to 60% shares | Less 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
Scenario | 60/40 Portfolio Life-Span |
---|---|
Historic average returns | 40 to 45 years |
Returns 1% lower than historic | 32 to 35 years |
GFC-style slump in first 5 years | 28 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
- Set a floor (e.g. $48 000) and ceiling (e.g. $65 000).
- Withdraw the lesser of:
- 4% of current balance, or
- the ceiling, though never below the floor.
- 4% of current balance, or
- 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
- Track 12 months of real spending to define your base number.
- Multiply by 25 (or 28 to 30 if aiming to retire at 45).
- Optimise fees: swap high-cost funds for low-fee index options.
- Review annually: cut spending by 5% when markets tumble.
- 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.