Constant-dollar withdrawals: the 4% rule as a way to actually live

We open the strategy tour with the one everybody has heard of, because it is the yardstick every other method is measured against: the constant-dollar withdrawal, better known by its most famous parameter as the 4% rule. In the FIRE series we examined where the 4% figure came from — Bengen in 1994, the Trinity Study in 1998. Here we treat it as what it actually is: a method for turning a portfolio into a paycheque, with its own distinctive personality, strengths, and a failure mode worth respecting.

How it works

The rule is almost aggressively simple. On the day you retire, you pick a starting withdrawal — the classic is 4% of your portfolio — and you take that as your income for year one. Every year after that, you give yourself a raise equal to inflation, and nothing else changes. You ignore what the market did. You ignore whether your portfolio doubled or halved. The pound amount you withdraw marches upward with the cost of living and pays no attention to anything else.

A worked example. Retire with £1,000,000 and a 4% rate, and year one you withdraw £40,000. Inflation that year runs 3%, so year two you withdraw £41,200 — regardless of whether the portfolio grew to £1,100,000 or fell to £850,000. Year three you adjust £41,200 up by that year’s inflation, and so on. Your spending is on rails. The market’s job is simply to keep the portfolio alive underneath a spending plan that refuses to negotiate.

What it’s good at

Its virtue is the thing every retiree craves and most strategies can’t offer: a stable, predictable, inflation-protected income. You know what you’re getting this year and, near enough, every year after. You can budget a life around it. There’s no arithmetic to do each January, no agonising over whether a bad market means you should cut the holiday. It is the strategy with the least behavioural friction, and that counts for a great deal — a plan you’ll actually follow beats a cleverer one you’ll abandon.

It also has the deepest historical evidence behind it. Because it’s the strategy Bengen and Trinity actually tested, we know precisely how it fared through every 30-year window since 1926, including the worst. When someone says a portfolio “survived,” they almost always mean it survived constant-dollar withdrawals — the hardest test, because the spending never flinched.

Where it breaks

And that refusal to flinch is exactly the flaw. Constant-dollar spending is blind to your portfolio, which makes it maximally exposed to sequence-of-returns risk. If a savage bear market arrives in your first few retired years, you keep withdrawing your full inflation-adjusted amount straight into the downturn — selling more and more shares at depressed prices to fund a paycheque that won’t bend. That’s precisely the behaviour that hollows out a portfolio permanently. The strategy that gives you the steadiest income in good times gives you the most dangerous income in bad ones.

There’s a subtler flaw too, pointing the other way: it’s often too cautious. Remember that the 4% rate was calibrated to survive history’s single worst starting year. In the average retirement, the constant-dollar retiree dies with a portfolio far larger than they began with — which means they under-spent for decades, denying themselves a richer life to guard against a disaster that, for them, never came. A rule tuned for the worst case is, by construction, wasteful in the typical case. You either run the small risk of ruin or the large risk of leaving a fortune on the table, and constant-dollar makes you pick your poison up front.

Who it suits

Constant-dollar is the right call when income stability matters more to you than income level or leaving a legacy — when your spending is largely non-negotiable and a wobbly paycheque would genuinely disrupt your life. It suits retirees whose essential spending eats most of their budget, who have limited ability to cut back, and who value simplicity over optimisation.

It’s the wrong call if you have meaningful flexibility in your spending, because then you’re leaving that flexibility unused — and, as the rest of this series shows, spending flexibility is the single most valuable thing you can bring to the decumulation problem. Why accept a plan that ignores your ability to bend when bending is exactly what buys safety?

Making it less rigid

In practice, almost nobody runs pure constant-dollar to the letter, and that’s healthy. Real retirees quietly skip the inflation raise after a brutal year, or trim the big discretionary line when the portfolio is down. Every one of those instincts is a step away from constant-dollar and toward the dynamic strategies we’ll meet next — and each step buys back safety. Constant-dollar is best understood as the rigid baseline from which every other strategy is a considered relaxation.

In Strata’s planning tools this is the “Fixed Dollar (4% Rule)” strategy: a constant real draw, set at retirement as your rate times your pot, then held flat in real terms. Running it through a Monte Carlo simulation shows you the honest picture the historical rule hides — not “it worked” or “it didn’t,” but the share of possible market sequences in which your steadfast paycheque outlasts you. Seeing that number is often what convinces people to loosen the rule a little.

Next we swing to the polar opposite: a strategy that pays attention to nothing but your portfolio and lets your income swing freely as a result — the constant-percentage withdrawal. Or, if you want to see how a fixed 4% draw behaves against your own portfolio across thousands of market paths, you can build your portfolio and test it.