The 4% Rule Explained — And Whether It Works in New Zealand
If you’ve spent any time in FIRE circles, you’ve heard about the 4% rule. It’s the backbone of almost every retirement calculation — effectively mathematically the same as the 25x rule we covered in our guide to how much you need to retire in New Zealand.
But where did it actually come from? Does it hold up? And does it apply to Kiwi investors building globally diversified portfolios?
Let’s take a look.
Where the 4% Rule Came From
The 4% rule traces back to a 1994 paper by American financial planner William Bengen. He asked a simple but important question: looking back through decades of market history, what’s the highest withdrawal rate that never caused a retirement portfolio to run out of money over a 30-year period?
His answer: 4%.
Bengen analysed rolling 30-year periods of US stock and bond returns going back to 1926 — including the Great Depression, the stagflation of the 1970s, and every major crash in between. In every single scenario, a retiree who withdrew 4% of their initial portfolio in year one — then adjusted that amount for inflation each year — still had money left after 30 years.
Four years later, in 1998, three professors at Trinity University in Texas published what became known as the Trinity Study. They expanded on Bengen’s methodology, tested different portfolio allocations and time horizons, and arrived at similar conclusions. Their work cemented the 4% rule as the standard reference point for retirement planning — and it’s been the foundation of FIRE thinking ever since.
The core conclusion from both studies: a portfolio invested roughly 50–75% in stocks, withdrawing 4% per year adjusted for inflation, has historically survived every 30-year retirement period in the US data.
How It Works in Practice
The mechanics are straightforward.
Say you retire with $1,500,000 invested. In year one you withdraw 4% — that’s $60,000. In year two, if inflation was 3%, you withdraw $61,800. The following year you adjust again. Your withdrawals keep pace with inflation while your portfolio continues to grow in the background.
The beauty of the approach is its simplicity. You don’t need to time the market, predict returns, or make complex decisions each year. You set your withdrawal rate and let compounding do the work.
This is also why the 25x rule is simply the flip side of the same coin — if 4% is safe, then you need 25 times your annual spending invested to make it work. The two rules are mathematically identical, just approaching from different sides.
$3,000,000 x 4% = $120,000
$120,000 x 25 = $3,000,000.
The Limitations You Need to Know
The 4% rule is a starting point, not a guarantee. There are several important caveats.
It was built on US data. The United States had an extraordinary run of economic growth throughout the 20th century. Whether future returns — in the US or anywhere else — will match that historical record is genuinely uncertain. Some researchers argue a more conservative 3–3.5% withdrawal rate is appropriate given current market valuations and lower expected bond returns.
It assumes a 30-year retirement. This is fine if you retire at 65. But if you’re targeting FIRE at 45 or 50, you could easily be funding a 40 or 50-year retirement. The longer your retirement horizon, the more conservative your withdrawal rate should be. Many early retirees use 3.5% — or 28x their annual spending — as their target to build in extra buffer.
It doesn’t account for taxes or fees. Bengen’s original research assumed a tax-free account with no management fees. In the real world, taxes and fees reduce your effective return. Keeping investment costs low — which globally diversified index funds do well — is important.
Sequence of returns risk is real. This is arguably the biggest risk for early retirees. If markets drop sharply in your first few years of retirement, you’re selling units at low prices to fund living costs. That permanently reduces your portfolio’s ability to recover, even if markets bounce back strongly later. A retiree who hits a bad sequence of returns in years one to five is in a far worse position than one who hits the same downturn in year fifteen.
Does It Work for New Zealand Investors?
The honest answer: it depends on how you’re invested.
If your portfolio is concentrated in New Zealand shares through the NZX, there are legitimate reasons to be cautious. New Zealand’s market is small, less diversified, and has historically underperformed global markets over long periods. A purely NZX portfolio introduces more concentration risk than the 4% rule’s research assumed.
But fortunately, most Kiwis pursuing FIRE aren’t investing solely in the NZX. The real question is whether the 4% rule applies to a globally diversified portfolio held by a New Zealand investor. And the answer there is much more positive.
Platforms like Kernel and InvestNow give New Zealand investors straightforward access to low-cost global index funds that track thousands of companies across dozens of countries. A globally diversified portfolio through these platforms is much closer in character to the portfolios Bengen and the Trinity researchers studied than a NZX-only portfolio would be.
Kernel in particular has built a strong reputation among NZ FIRE investors for its low fees and well-constructed index funds — including the new total world fund, global funds, a NZ 20 fund, and infrastructure options. Their fee structure makes it practical to build a genuinely diversified portfolio without paying the kind of fund management costs that quietly erode long-term returns.
InvestNow gives you access to a wide range of funds from multiple managers — including Vanguard and other globally recognised providers — all in one place. For investors who want flexibility and choice across different asset classes and fund managers, it’s a strong option.
The key point: if your portfolio is globally diversified and low-cost, the 4% rule is a reasonable framework for NZ-based retirement planning. It’s not a guarantee, but it’s a well-researched starting point backed by nearly a century of data.
The NZ Super Variable
One thing that genuinely changes the equation for Kiwi retirees is NZ Superannuation.
If you retire early — say at 50 — and NZ Super kicks in at 65, you have a significant income stream arriving partway through your retirement. That changes your withdrawal maths considerably.
Think of it this way: for the first 15 years you’re fully drawing from your portfolio. From 65 onwards, NZ Super covers a meaningful portion of your living costs — currently around $28,860 per year for a single person living alone, or $44,400 per year for a couple (2026–27 rates). Your portfolio withdrawals can drop accordingly, significantly extending how long your money lasts.
This is one reason why the 4% rule, already conservative, works even more comfortably for many Kiwi early retirees than the raw numbers suggest. The arrival of NZ Super partway through retirement acts as a natural circuit breaker that reduces pressure on the portfolio precisely when sequence of returns risk starts to diminish anyway.
As we covered in our retirement number guide, we’d still recommend building your FIRE plan without relying on NZ Super — treat it as a bonus rather than a foundation. But it’s worth understanding how it improves your numbers if and when it does arrive.
What Withdrawal Rate Should You Use?
Here’s a practical framework depending on your situation:
| Retirement Age | Suggested Withdrawal Rate | Equivalent Multiplier |
| 65+ | 4% | 25x annual spending |
| 55–64 | 3.5% | ~28x annual spending |
| 45–54 | 3.25–3.5% | 28–31x annual spending |
| Under 45 | 3–3.25% | 31–33x annual spending |
These aren’t hard rules — they’re starting points. Your actual situation will depend on your portfolio mix, flexibility to reduce spending if needed, other income sources, and how you feel about risk.
The most important variable is flexibility. Retirees who can reduce spending by 10–15% during a market downturn dramatically improve their chances of long-term success. The 4% rule assumes a fixed inflation-adjusted withdrawal every year — but real life doesn’t work that way. Most people naturally spend less during market stress and more when times are good.
The Bottom Line
The 4% rule is one of the most well-researched rules of thumb in personal finance. It’s not perfect, and it wasn’t designed with early retirees or New Zealand investors specifically in mind. But for a Kiwi investor with a globally diversified, low-cost portfolio — built through platforms like Kernel or InvestNow — it remains a solid and practical framework.
Use it as your starting point. Adjust for your retirement age. Keep your costs low. Build in some flexibility. And remember that NZ Super, if it’s still around when you turn 65, will take real pressure off your portfolio in the back half of your retirement. And don’t forget to enjoy the journey!
The 4% rule won’t guarantee a perfect retirement. But it’s the best evidence-based starting point we have — and for most people on the FIRE path, that’s exactly what they need.
Nothing in this post constitutes financial advice — this is general in nature. Please consult a qualified financial adviser licensed in your jurisdiction for advice specific to your situation.
Leave a Reply