Why new retirees may need to rethink the 4% rule

• The 4% withdrawal rule is a popular retirement strategy that helps investors withdraw money safely from their accounts, with low odds of running out of money later.
• Lower expectations for long-term stock, bond and cash returns means new retirees may need to proceed a bit more cautiously, according to Morningstar.
• There are ways retirees can be more flexible with their spending, experts said.

A popular retirement strategy known as the 4% rule may need some recalibration for 2025 based on market conditions, according to new research.

The 4% rule helps retirees determine how much money they can withdraw annually from their accounts and be relatively confident they won't run out of money over a 30-year retirement period.

According to the strategy, retirees tap 4% of their nest egg the first year. For future withdrawals, they adjust the previous year's dollar figure upward for inflation.

But that "safe" withdrawal rate declined to 3.7% in 2025, from 4% in 2024, due to long-term assumptions in the financial markets, according to Morningstar research.

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Specifically, expectations for stock, bond and cash returns over the next 30 years declined relative to last year, according to Morningstar analysts. This means a portfolio split 50-50 between stocks and bonds would have less 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 a co-author of the new study.

That may mean reducing spending in down markets, for example, she said.

"We caution, the assumptions that underpin [the 4% rule] are incredibly conservative," Benz said. "The last thing we want to do is scare people or encourage people to underspend."

How the 4% rule works

In many ways, drawing down one's nest egg is harder than growing it.

Pulling out too much money early in one's retirement years — especially in down markets — generally raises the odds that a saver will run out of money in later years.

There's also the opposite risk, of being too conservative and living well below one's means.

The 4% rule aims to guide retirees to relative safety.

Here's an example of how it works: An investor would withdraw $40,000 from a $1 million portfolio in the first year of retirement. If the cost of living rises 2% that year, the next year's withdrawal would rise to $40,800. And so on.

Historically — over a period from 1926 to 1993 — the formula has yielded a 90% probability of having money remaining after a three-decade-long retirement, according to Morningstar.

Using the 3.7% rule, the first-year withdrawal on that hypothetical $1 million portfolio falls to $37,000.

That said, there are some downsides to the framework of the 4% rule, according to a 2024 Charles Schwab article by 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 applies to a "very specific" investment portfolio — a 50-50 stock-bond mix that doesn't change over time, they wrote.

It's also "rigid," Kawashima and Williams said.

The rule "assumes you never have years where you spend more, or less, than the inflation increase," they wrote. "This isn't how most people spend in retirement. Expenses may change from one year to the next, and the amount you spend may change throughout retirement."

How retirees can tweak the 4% rule

There are some tweaks and adjustments 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 OK with spending less later, it means they can safely spend more in their earlier retirement years, Benz said.

This tradeoff would yield a 4.8% first-year safe withdrawal rate in 2025 — much higher than the aforementioned 3.7% rate, according to Morningstar.

Meanwhile, long-term care is a big "wild card" that could increase retirees' spending in later years, 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 Genworth's latest cost of care study.

Additionally, investors may be able to give themselves a bit of a raise when markets are up significantly in a given year and reduce withdrawals when markets are down, Benz said.

If possible, delaying Social Security claiming to age 70 — thereby increasing monthly payments for life — may be a way for many retirees to boost their financial security, she said. The federal government adds 8% to your benefit payments for each full year you delay claiming Social Security benefits beyond full retirement age, until age 70.

However, this calculus depends on where households get their cash in order to defer the Social Security claiming age. Continuing to live off job income is better, for example, than leaning heavily on an investment portfolio to finance living costs until age 70, Benz said.