Monte Carlo vs the 4% rule

Both answer the same question: how much can I safely take out? They answer it in different ways, and the difference matters more as the retirement gets longer or the markets get stranger.

What the 4% rule measures

The 4% rule comes from historical research. It asks a narrow question: in the worst 30-year window in US history, what withdrawal rate still left something behind? The answer was about 4%.

It is simple, memorable, and useful as a first estimate. It is also a single path through history, and it assumes a 30-year retirement, a US portfolio, and a fixed inflation-adjusted withdrawal.

What Monte Carlo measures

A Monte Carlo simulation runs the plan many times. Each run uses a different market every year, drawn from a distribution, and often a different lifespan. Then it counts how often the money lasted.

The output is not one number. It is a probability. For example, a $1.1 million portfolio might last in 80 of 100 simulated futures. That is a different kind of statement, and a more honest one.

The difference that matters: sequence risk

Two plans with the same average return can end very differently depending on when the bad years arrive. A bad first decade forces you to sell into a falling market, which permanently shrinks the pool. A bad last decade matters far less.

The 4% rule hides this. A Monte Carlo run exposes it, because you can see the spread between the unlucky and lucky paths.

Confidence is a choice, not a guarantee

A simulation does not promise the future. It tells you how often a plan held up across the futures it tried. You choose the bar.

• 80% confidence is a realistic plan. Roughly one in five futures leaves you short.
• 90% confidence is a fortress. It survives severe, prolonged recessions, and it costs more.

Neither is "correct". The right level depends on how much flexibility you have and how well you sleep.

When the 4% rule is enough

If you are retiring at 65, with a 30-year horizon, a US portfolio, and flexible spending, the 4% rule is a reasonable first pass. Use it to get in the ballpark.

When to use Monte Carlo

Use a simulation when any of these is true.

• You are retiring early, so the horizon is longer than 30 years.
• Your spending is not flat. It rises and falls with age.
• You have guaranteed income, like Social Security or a pension, that covers part of the need.
• You want to know the odds, not just a number.

The practical answer

Use the 4% rule to sanity-check. Use a simulation to decide. If the two disagree by a lot, the simulation is usually telling you something the rule cannot see: the shape of the years, not just the average.

Run your own 1,000 futures and see your number at the confidence you choose.