Which payment does the percentage describe?
Which base carries forward after the first payment?
Start from the first payment
€20,000
↓ Keep euros unchanged€20,000Less purchasing power
↓ Adjust for 5% inflation€21,000Same purchasing power under this index
Start from current capital
€400,000
↓ Take 4% again€16,000Payment falls with capital
The later balance is given, not a reconstructed return. The indexed payment takes 5.25% of it.
A current-balance rule reduces spending when capital falls, potentially leaving bills unpaid.
The initial-percentage convention
The common 4% convention takes that share of initial capital, then indexes the currency amount; it does not repeatedly take 4% of the remaining balance. Vanguard qualifies it by horizon, costs and historical US assets.
Indexed: €20,000 × 1.05 = €21,000; current-balance: €400,000 × 0.04 = €16,000. Neither establishes lifetime affordability.
Read the study’s assumptions alongside its rate.
Identify assets, dates, payment timing, currency, costs, taxes, maintenance and permitted spending cuts. Another country or future market need not reproduce the result.
Bengen’s dated study and the shared observations
Bengen’s historical stock/bond and inflation-adjusted withdrawal study first appeared in 1994; the link is a 2004 reprint. Its historical US allocation conclusions are not universal instructions adopted here.
Overlapping periods share observations. Selected starts matter; a sample’s worst result is not the worst possible. Decimal precision cannot fix mismatched implementation or tax assumptions.
“Still above zero” is one success test.
A household may need essentials every year, a real inheritance, a survivor’s support or occasional large bills. A positive final balance does not establish all those outcomes. A high average ending value can hide failed cases.
Different definitions can produce different success rates
Non-exhaustion, a minimum real inheritance and spending cuts can give different success rates on the same return paths. Simulations also need return/inflation assumptions and permitted flexibility stated. The SEC distinguishes hypothetical results, actual records and guarantees; modelled success remains inside the model.
Who may need support after the average lifetime?
Life expectancy is an average, not a date when a particular person stops needing money. A couple may need funding until the second death; income and expenses can change after the first.
Early retirement, later care, inflation and uncertain work alter the requirement. The Society of Actuaries distinguishes an average from the range a plan may need to support; a convenient study endpoint does not settle a survivor’s budget.
Write a fallback the household could carry out.
Record capital included, first payment, adjustment method, horizon and remaining costs. Specify whether figures show a gross portfolio withdrawal or net spendable money. Count outside income separately once.
Specify feasible spending, work, timing or resource changes, with limits. A formula permitting cuts does not make necessary bills reducible. Unfunded essentials require another answer, not a more familiar percentage.