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Known as the popular retirement strategy the 4% rule some recalibration may be needed by 2025 depending on market conditions, according to new research.
The the 4% rule helps retirees determine how much money they can withdraw from their accounts each year and ensure they won’t run out of money during their 30-year retirement.
Under the strategy, retirees take 4% of their nest egg in the first year. For future withdrawals, they adjust the previous year’s dollar figure upward for inflation.
But that “safe” withdrawal rate fell to 3.7% in 2025 from 4% in 2024 due to long-term assumptions in financial markets, according to Morningstar. research.
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Specifically, expectations for returns on stocks, bonds and cash over the next 30 years fell compared to last year, according to analysts at Morningstar. This means that a portfolio split 50-50 between stocks and bonds would have lower growth.
While history shows the 4% rule is a “reasonable starting point,” retirees can generally deviate from the retirement strategy if they’re willing to be flexible with annual spending, said Christine Benz, director of personal finance and retirement planning at Morningstar and co-author of the new study.
This means, for example, reducing spending in down markets, he said.
“We are careful that the underlying assumptions (the 4% rule) are very conservative,” Benz said. “The last thing we want to do is scare people or encourage people to underspend.”
How the 4% Rule Works
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In many ways, laying a nest egg is harder than growing it.
Withdrawing too much money during the retirement years, especially in down markets, increases a saver’s chances of saving. run out of money in the following years
There is also the opposite risk of being too conservative and living below one’s means.
The 4% rule aims to steer retirees toward relative safety.
Here’s an example that works: An investor would withdraw $40,000 from a $1 million portfolio in the first year of retirement. If the cost of living increased by 2% that year, the next year’s withdrawal would increase to $40,800. And so on.
Historically — from 1926 to 1993 — the formula has given a 90% chance of remaining money after a three-decade retirement, according to Morningstar.
Using the 3.7% rule, the first-year withdrawal for that hypothetical $1 million portfolio drops to $37,000.
That said, according to 2024 Charles Schwab, there are downsides to the 4% rule framework. the article Chris Kawashima, director of financial planning, and Rob Williams, managing director of financial planning, retirement income and wealth management.
For example, it doesn’t include taxes or investment fees, and it applies to a “very specific” investment portfolio: a 50-50 mix of stocks and bonds that doesn’t change over time, they wrote.
It’s also “stiff,” Kawashima and Williams said.
The rule “assumes you don’t have a year where you spend more or less than the increase in inflation,” they write. “That’s not how most people spend in retirement. Spending can change from year to year, and the amount you spend can change throughout retirement.”
How retirees can tweak the 4% rule
There are some changes and adjustments that retirees can make to the 4% rule, Benz said.
For example, retirees generally spend less in the later years of retirement, in inflation-adjusted terms, Benz said. If retirees can enter retirement and be okay with spending less later, it means they can safely spend more in their retirement years, Benz said.
This commitment would result in a first-year withdrawal rate of 4.8% in 2025, according to Morningstar, much higher than the quoted rate of 3.7%.
Meanwhile, long-term care is a big “wild card” that could increase spending for retirees in the years to come, Benz said. For example, the typical American paid about $6,300 a month for a home health aide and $8,700 a month for a semi-private room in a nursing home in 2023, according to the latest from Genworth. cost of care to analyze
Also, investors can give a little boost when the markets go up significantly in a given year and reduce withdrawals when the markets go down, Benz said.
If possible, delaying claiming Social Security until age 70 — thereby increasing monthly payments for the rest of your life — could be a way for many retirees to increase their financial security, he said. The federal government adds 8% of your benefit payments for each full year you delay claiming Social Security benefits full retirement ageup to 70 years
However, this calculation depends on how much money families have to delay the Social Security claim age. Benz said it’s better to continue living off work income, for example, than to lean heavily on an investment portfolio to finance living costs until age 70.
