The 4% rule, and why 3.5% is safer for Swiss early retirees

The 4% rule is the most quoted idea in the FIRE world. It is a useful starting point and a poor finishing point. Here is what it says, where it comes from and why this site starts lower.

What the rule says

In the first year of retirement you withdraw 4% of your starting portfolio. In each later year you withdraw the same amount, adjusted for inflation. The rule comes from the 1990s work of William Bengen and the later "Trinity study", which tested portfolios of shares and bonds against US market history. In nearly every 30-year period tested, a portfolio with a large share of equities lasted the full 30 years.

On CHF 1,200,000, that means CHF 48,000 in the first year, or CHF 4,000 a month.

What the rule does not say

• It is US history. The United States had an unusually strong century. Other countries did worse.
• It covers 30 years. A person retiring at 45 needs 50 years or more.
• It ignores taxes, fees and currency. Swiss investors face wealth tax, fund costs and a franc that tends to rise against the currencies of their investments.
• It assumes fixed spending. Real people spend less when markets fall, which helps.
• It assumes no pensions. In Switzerland, AHV and the pension fund arrive later and reduce the load.

Why 3.5% for early retirees

The calculator starts at the classic 4%. For an early retiree we suggest 3.5%, because the horizon is longer than the test period and because it leaves room for fees and taxes. It is a cautious choice, not a magic number. Change it in the calculator and compare.

How to choose your own rate

1. Match the horizon. About 30 years: 4% is defensible. 40 to 50 years: 3 to 3.5%.
2. Count your pensions. Apply the rate to the gap that your pensions will not cover, not to your whole spending. See your FIRE number.
3. Plan to flex. If you can cut 10% in a bad year, you can start a little higher.
4. Know the main danger. It is not the average return but the order of returns early on. See sequence risk.
5. Decide whether you want money left over. Some people want to leave it all, others to spend it down. See rent for life, die with zero.
6. Keep costs low. See investing in Switzerland: ETFs, domicile and fees.

Next step

Try 3%, 3.5% and 4% in the calculator and look at the three independence ages. The gap shows how much safety costs.