One of the cornerstones of retirement planning is determining how much you can safely withdraw each year while maintaining a certain quality of life. And it wouldn’t take much searching to come across one of the most popular ways to do that: the “4% rule.”
The 4% rule, which has been around for more than three decades now, has become one of the most widely used withdrawal rules-of-thumb for retirees. But it has become a touch outdated—indeed, even the rule’s creator has suggested that the formula itself should be altered to keep up with modern times.
The modification (which I’ll go into shortly) is useful, but research suggests that another withdrawal rate might make even more sense.
Today, I’m going to catch you up on the 4% rule, explain a new recommended withdrawal rule that might replace it, and then talk about other withdrawal strategies to consider.
Why Do I Need a Retirement Withdrawal Strategy?
First, let’s review the importance of a solid retirement withdrawal plan.
Have you thought about how you’ll meet your financial obligations in retirement? If not, you might be under the impression that you’ll simply withdraw money from your retirement account as you need it, treating your 401(k) like an ATM whenever the urge arises.
Not so! You’ll want to withdraw a predetermined amount of money on a regular basis—an amount calculated to both fulfill your needs while also ensuring you won’t run out of money during your retirement. That latter is a common concern: Poor market conditions, skyrocketing inflation, even living longer than you expected can all result in a situation where you outlive your savings and struggle in your later years.
Conversely, you don’t want to spend your golden years withdrawing a bare minimum to survive.
Your goal should be to withdraw enough every year to live comfortably and enjoy your retirement. Withdrawal strategies like the 4% rule are designed to provide you with that balance.
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What Is the 4% Rule?
The 4% rule was created by William Bengen, a retired financial advisor.
The rule suggests that a retiree could withdraw up to 4% in their first year of retirement—then in each subsequent year, take the previous dollar amount they withdrew and increase it by the rate of inflation—and have their nest egg last at least 30 years. (This assumes a portfolio with a stock allocation of between 50% and 75%, with the rest in bonds and cash.)
Here’s an example based on $1 million in total retirement savings.
- First year of retirement: You would withdraw 4% of your savings, so, $40,000.
- Inflation at the end of this year comes to 2.5%.
- Second year of retirement: You would withdraw $40,000 plus the prior year’s rate of inflation (2.5%). That’s $40,000 x 0.025 = $1,000. So, you would withdraw $41,000 ($40,000 + $1,000).
- Inflation at the end of this year comes to 3%.
- Third year of retirement: You would withdraw $41,000 plus the prior year’s rate of inflation (3.0%). That’s $41,000 x 0.03 = $1,230. So, you would withdraw $42,230 ($41,000 + $1,230).
This would continue throughout the rest of your retirement.
Bengen eventually explained that the 4% scenario was more of a worst-case scenario. Per MarketWatch, it was “based on someone who retired at the worst moment he could find in modern times: October 1968, just as the stock market peaked, and runaway inflation was beginning.”
In other words, under the worst possible market and inflation conditions, an investor would be able to withdraw as much as 4% at the start and be fine. But under better market and inflation conditions, retirees would be able to start with an even higher percentage and be fine across their retirement timeline.
When the 4% Rule Isn’t the 4% Rule
Bengen didn’t just plant his flag in the ground and call it a day, of course. He has revisited his 4% rule on numerous occasions, and even changed the parameters.
A few years ago, Bengen suggested that the maximum safe withdrawal number could be up to 4.5%. That doesn’t sound like much, but on that million-dollar portfolio, that comes out to $5,000 more in the first year of retirement.
Bengen tweaked his rule yet again earlier this year, suggesting that retirees can now safely withdraw up to 4.7% in the first year of retirement.
Related: When Should You Take Social Security?
Morningstar’s Withdrawal Recommendation
A potentially better withdrawal strategy comes from Morningstar, whose idea is very similar to the 4% rule, with a few small differences.
Morningstar’s rule assumes a first-year starting level, as well as an annual inflation adjustment (which it assumes to be 2.3% on average). It also assumes the highest starting safe withdrawal percentage comes from a portfolio that’s only 20% to 50% allocated to equities.
While Morningstar’s rule previously agreed that 4% was a safe starting rate, at the end of 2024, they changed their number to 3.7%. This number provides a 90% probability of success (that the retiree would still have funds remaining after 30 years).
“The decrease in the withdrawal percentage compared with 2023 owes largely to higher equity valuations and lower fixed-income yields, which result in lower return assumptions for stocks, bonds, and cash over the next 30 years,” Morningstar says.
It’s important to note there’s a lot of nuance and circumstance behind such projections. For instance, Morningstar notes that spending patterns don’t remain static in retirement, and that can affect the baseline safe withdrawal percentage:
“Based on studies of actual spending during retirement, retirees often decrease their inflation-adjusted spending over time, a pattern that can also lead to considerably higher safe withdrawal rates. Incorporating actual spending patterns over retirees’ lifecycles leads to a safe starting withdrawal percentage of 4.8%, assuming a 30-year horizon and a 90% probability of success.”
Also, older retirees with shorter time frames can generally afford to spend more. For instance, if you only expect to be retired for 20 years because you retired at an older age, you might be able to start with 5% withdrawals and adjust for inflation thereafter, Morningstar says.
Related: When Should You Take Social Security?
What Are Other Popular Withdrawal Strategies?
Morningstar’s rule and the 4% rule are both variations of the dollar-plus-inflation withdrawal strategy. That route has retirees take out a predetermined percentage of savings in their first year of retirement and then take out the same dollar amount adjusted for inflation or deflation during subsequent years.
That’s just one of several retirement withdrawal strategies worth considering. Some of the others include:
- Dynamic percentage-of-portfolio strategy: You withdraw a set percentage in your first year, then adjust your withdrawal rate based on market conditions. A good market allows you to withdraw more, while a poor market requires you to take out less.
- Fixed-percentage-of-portfolio strategy: True to its name, this method has you withdraw a set percentage of retirement savings every year … and that’s it. No adjustments are made.
- Fixed-dollar withdrawal strategy: You withdraw a fixed dollar amount from your accounts regardless of market conditions or inflation. This is even simpler than the fixed-percentage strategy in that the number never changes, but it leaves you extremely susceptible to inflation and poor investment performance.
I can’t emphasize enough that there’s no one-size-fits-all retirement strategy. The best strategy for you could be one of the above, a variation of one of the above, or a strategy that doesn’t even show up on this list.
Because your financial situation, risk tolerance, and longevity are unique, you should discuss your unique needs with a financial advisor.
Related: Are You Retirement-Ready? 10 Questions to Ask Yourself
Are My Retirement Account Withdrawals Taxed?
Typically, yes. At least some of your retirement distributions will likely come from a tax-deferred account, meaning that money is taxable upon withdrawal. And your tax bracket will affect the level at which that money is taxed.
If you have any accounts funded with post-tax dollars (so, any Roth account), your contributions can always be withdrawn tax- and penalty-free. And as long as you’re at least age 59½ and your Roth IRA was funded at least five years ago, you can withdraw earnings tax- and penalty-free.
If you have both tax-deferred and tax-free accounts, you’ll want to consider a withdrawal plan with these tax consequences in mind. For people with only tax-deferred accounts, you might want to consider a Roth conversion, which will ensure at least some of your assets can be withdrawn tax-free once you retire.
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