Guide
The 4% rule in Canada
Reviewed by The Retirement Beast editorial team · figures verified against CRA / Service Canada · Updated
The most famous rule of thumb in retirement planning is a useful starting point and a poor final answer. Here is what it says, how to apply it in Canada, and where it breaks.
Stress-test your planQuick answer
The 4% rule says you can withdraw about 4% of your portfolio in year one of retirement, then raise that dollar amount with inflation each year, with a low risk of running out over ~30 years — so you need roughly 25× your first-year withdrawal. In Canada, apply it only to the spending CPP and OAS do not already cover.
On this page
- What the rule actually says
- How to use it (the 25× shortcut)
- The Canadian twist: subtract CPP and OAS first
- Where the rule breaks
- How to pressure-test it
- FAQs
What the rule actually says
The 4% rule comes from studies of historical markets: a retiree who withdrew 4% of a balanced portfolio in the first year, then adjusted that dollar figure for inflation annually, rarely ran out of money over a 30-year retirement. It is a withdrawal guideline, not an investment return assumption.
How to use it (the 25× shortcut)
Because 4% is 1/25, the rule has a handy inverse: multiply the annual spending your savings must cover by 25 to get a rough target. Need $30,000/year from your portfolio? That is about $750,000. Need $40,000? About $1,000,000.
The Canadian twist: subtract CPP and OAS first
The biggest mistake Canadians make with the 4% rule is applying it to their whole spending. CPP and OAS are inflation-indexed lifetime income, so you only apply the rule to the gap they do not cover. If you want $55,000/year and government benefits provide $22,000, your portfolio only needs to fund ~$33,000 — a target of about $825,000, not $1.375M. See how much you need to retire.
Where the rule breaks
- Sequence-of-returns risk. A market crash in your first few retirement years does far more damage than the same crash later — something a fixed 4% cannot see.
- Longevity. The rule targets ~30 years; retire early or live long and it can be too aggressive.
- Taxes and fees. 4% is usually stated pre-tax and pre-fee; both reduce what you actually keep.
- Rigidity. Real retirees adjust spending in down years — flexibility improves safety far more than picking 3.5% vs 4%.
How to pressure-test it
Use the rule to get a first number, then test that number against real market variability and your own timeline. The Monte Carlo stress test shows your success probability across hundreds of return paths (including bad-early sequences), and the cash-flow projection shows year by year what age your money lasts to. Together they turn a rule of thumb into a plan.
Frequently asked questions
What is the 4% rule?
A guideline that you can withdraw about 4% of your portfolio in your first year of retirement, then adjust that dollar amount for inflation each year, with a low risk of running out over roughly 30 years. Equivalently, you need about 25× your first-year withdrawal.
Does the 4% rule work in Canada?
It is a reasonable starting point for Canadians, but it is only a rule of thumb. It ignores CPP and OAS (which reduce how much your own savings must provide), taxes, fees, and your personal longevity — so treat it as a sanity check, not a plan.
Is 4% too conservative or too aggressive?
Both, depending on the situation. For a very long retirement or a poor run of early returns it can be too aggressive; for a shorter retirement with guaranteed pension income it can be too conservative. Flexibility on spending matters more than the exact percentage.
How does the 4% rule account for CPP and OAS?
It does not directly. In Canada you apply it only to the spending your own savings must cover after CPP, OAS, and any workplace pension — which is usually far less than your total spending.