🧩 Is the 4% Rule Relevant to Bitcoin?

FIRE BTC Issue #21 - Finding your FIRE number with bitcoin

The number one question on everyone’s mind when they start their FIRE journey is: How much do I need to reach financial independence?

The 4% rule has become the default position for most FIRE practitioners. It’s simple, straightforward, and generally recognized as a good rule of thumb in the larger personal finance community.

To refresh your memory, the 4% rule is derived from the Trinity Study. It states that a retirement portfolio of stocks and bonds will survive 30+ years of 4% annual withdrawals before being depleted. From this rule, we can calculate the necessary starting value of a savings portfolio to cover annual expenses of a specified amount.

\(annual expenses / 0.04 = FIRE target\)

Inverting the math means you can simply multiply your annual expenses by 25 to calculate your savings portfolio goal. For every $40k in annual expenses, you need $1 million saved. Spend $100k annually? You’ll need to have $2.5 million in your savings portfolio to reach financial independence and be able to retire.

While the 4% rule is well-established for a more traditional approach to personal finance, we now have the ability to incorporate the ultimate savings vehicle: bitcoin. That begs the question: How does adding bitcoin into the mix affect the 4% rule?

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🧱 Built-in assumptions

If the goal is to reach financial independence using a savings portfolio, we need to understand a safe withdrawal rate (SWR). This is the percentage of your retirement savings you can withdraw each year with a high likelihood of not running out of money.

The 4% rule provides an answer to the SWR question, but it’s important to understand the core assumptions built into it. Doing so enables a better thought process when considering how incorporating bitcoin into the savings mix might affect a SWR, and therefore our approach to FIRE.

Here’s what it assumes:

1. Portfolio Composition: The rule assumes a balanced portfolio, typically split between stocks and bonds—often modeled as 50% stocks (like the S&P 500) and 50% bonds (like U.S. Treasury bonds). Some variations tweak this to 60/40 or similar, but the idea is a mix of growth and stability.

2. 30-Year Time Horizon: It’s designed for a 30-year retirement. If you retire at 65, it assumes you won’t live past 95. Shorter or longer lifespans could break it.

3. Historical Market Performance: The rule leans on U.S. historical data, primarily from the 1920s onward, including periods like the Great Depression. It assumes future returns and volatility will roughly resemble this past, with average annual stock returns around 7% after inflation and bonds around 2-3%.

4. Inflation Adjustments: Withdrawals increase annually based on inflation (e.g., using the Consumer Price Index), assuming inflation averages around 3% long-term, consistent with historical norms.

5. No Major Spending Shocks: It presumes relatively predictable expenses. Big one-time costs (like medical emergencies) or lifestyle changes could throw it off.

6. Success Defined as Not Running Out: The rule targets a 90-95% success rate, meaning the portfolio survives 30 years in most historical scenarios. It tolerates some risk of failure, especially in worst-case market conditions (e.g., retiring just before a crash).

We can keep most of these assumptions intact when adding bitcoin into the savings portfolio. The biggest potential disruptions to the 4% rule come from bitcoin’s potential growth rate and its volatility.

🔧 Adjusting for bitcoin’s growth potential

Bitcoin is well known for its massive historical growth in value and infamous for its price volatility.

If similar levels of growth and volatility are expected well into the future, it’s worth asking the question: How could this affect the path to FIRE for hodlers of bitcoin?

We don’t have the long historical record that the Trinity Study relies on, because bitcoin is only 15 years old. So we’ll need to rely on our reasoning skills and insert some assumptions of our own. This will be more of a qualitative process rather than a quantitative one, but it should be sufficient for the purpose at hand.

First, a side note — While the Trinity Study is based on split portfolio of stocks and bonds, I don’t hold bonds. I understand the theoretical rationale of wanting lower volatility, especially later in life, having an income stream from coupon payments, and perhaps getting some tax benefits. For my taste, I’d rather opt for greater total wealth instead.

As stated above, assuming 7% real returns on the stock market is a core driver to the 4% rule. I expect bitcoin to provide returns much higher than that. If that’s true, a larger allocation to bitcoin will increase your portfolio growth rate, all other things being equal, which implies that a higher withdrawal rate may be feasible.

If bitcoin grows twice as fast as stocks on average (14%), does that mean we can also double our withdrawal rate (to 8%)? On the surface, I believe that’s true, but only for the portion of your savings portfolio allocated to bitcoin.

To tweak the safe withdrawal rate for a portfolio that includes bitcoin, we can take a blended approach. As an illustration, let’s calculate a new FIRE target number:

Formula: (AE_stocks / stocks_SWR) + (AE_btc / btc_SWR) = FIRE_target

Annual expenses: $100,000
Portfolio construction: 50% stocks, 50% bitcoin

AE_stocks = $100,000 * 50% = $50,000
AE_bitcoin = $100,000 * 50% = $50,000
stocks_SWR = 4%
btc_SWR = 8%

$50,000 / 4% = $1,250,000
$50,000 / 8% = $625,000

FIRE_target = $1,250,000 + $625,000 = $1,875,000

Here’s what it looks like for a higher allocation to bitcoin:

Formula: (AE_stocks / stocks_SWR) + (AE_btc / btc_SWR) = FIRE_target

Annual expenses: $100,000
Portfolio construction: 25% stocks, 75% bitcoin

AE_stocks = $100,000 * 25% = $25,000
AE_bitcoin = $100,000 * 75% = $75,000
stocks_SWR = 4%
btc_SWR = 8%

$25,000 / 4% = $625,000
$75,000 / 8% = $937,500

FIRE_target = $625,000 + $937,500 = $1,562,500

Assuming 8% withdrawals and 14% real returns from bitcoin enables a FIRE BTC practitioner to reach their financial independence goal much earlier. Instead of needing $2.5m to cover $100k in annual expenses, you would need only $1.875m for a 50/50 allocation or $1.56m for a 25/75 allocation. That’s 25% less and 37.5% less, respectively.

Sounds great on the surface, but that’s not the whole story. Bitcoin is much more volatile than the stock market.

🔩 Adjusting for bitcoin’s volatility

In the Trinity Study, the small percentage of scenarios where the 4% withdrawal rate failed were primarily driven by sequence-of-returns risk—essentially, bad luck with market performance early in retirement. Here’s what caused those failures:

1. Poor Market Returns at the Start: The failures often occurred when retirees began withdrawing during or just before a major market downturn, like the Great Depression (1929) or the stagflation period of the 1970s. If stocks and bonds tank early, the portfolio takes a big hit while withdrawals continue, leaving less capital to recover during later upswings.

2. High Inflation Early On: In some failure cases, inflation spiked shortly after retirement (e.g., the 1970s oil crisis years). Since the 4% rule adjusts withdrawals upward with inflation, this forces larger withdrawals early, draining the portfolio faster when it’s already weakened by poor returns.

3. Sustained Low Returns: A few scenarios saw prolonged periods of below-average returns for both stocks and bonds. The 4% rule assumes a long-term average (e.g., ~7% real return for stocks), but if returns stay low for a decade or more, the portfolio can’t keep up with withdrawals.

4. No Flexibility: The study assumes a rigid withdrawal plan—4% adjusted for inflation every year, no matter what. In reality, cutting spending during bad years could prevent failure, but the model doesn’t account for that adaptability.

These failures were rare—about 5-10% of the historical scenarios tested from 1926 to 1994, depending on the exact portfolio mix (e.g., 50/50 vs. 75/25 stocks/bonds). The worst cases often tied to retiring in the late 1960s or early 1970s, when high inflation and mediocre market returns combined for a brutal stretch. The takeaway? Timing matters, and the 4% rule isn’t bulletproof if you hit a perfect storm early.

All of this applies to a portfolio with a large bitcoin allocation, and it’s amplified due to its higher volatility profile. While many people believe bitcoin’s volatility will decrease over time as adoption broadens and its market cap swells, it may still be significantly higher than the stock market.

So, how can we mitigate sequence-of-withdrawals risk if you’re unlucky with your timing? Here are a few ideas to consider:

• Withdraw more from stocks: If you have some allocation to stocks, you may consider drawing more heavily from that portion of the portfolio in the early years. Giving the bitcoin portion more time to cook will likely ensure higher returns over the course of your retirement.

• Cut expenses: FIRE folks tend to be great at managing expenses. If the market is not cooperating in the first year or two after you quit working, cutting back a bit will help tremendously. It’s only temporary.

• Mark your bitcoin more conservatively: The market price of bitcoin is volatile, but moving averages smooth things out. The 200-week moving average is currently around $44k (about 50% of the current price), and so far it has never trended lower. If you value your bitcoin at this more conservative level, you’ll start retirement with a much larger portfolio.

• Be flexible: Consider part-time work or other ways to maintain income in the first few years after reaching financial independence. A partial retirement means you’ll draw down less of your portfolio during the riskiest part of this process.

Obviously, reacting with a mix of the above makes a lot of sense to combat sequence-of-withdrawal risk.

The FIRE approach is not rigid or mechanical. We use rules of thumb, like the 4% rule (or in bitcoin’s case, maybe the 8% rule), to guide us on our financial path. Bitcoin is the ultimate savings vehicle, but we must take into account its unique profile.

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That’s it for this week. Thanks for reading!

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Until next time,

Trey ✌️