Research Suggests Slashing the 4% Rule for 2025

Evaluating Morningstar’s latest research on safe withdrawal rates and suggestions for how to make your retirement last for 2025 and beyond.

One of the most common questions I get asked is: What is a safe withdrawal rate for retirement? It’s a good question–finding the right withdrawal rate can make all the difference in maximizing your income during retirement. Historically, the “4% rule” has been the go-to benchmark, but is that still valid today? 

Let’s dive into Morningstar’s latest findings and discover what they suggest as the new “safe withdrawal rate” and how you can design your retirement to incorporate it.

What Is the Safe Withdrawal Rate?

Before we break down the specifics, it’s crucial to understand what the safe withdrawal rate really represents. This isn’t a guaranteed, foolproof formula to ensure you’ll never run out of money. Instead, it’s a guideline based on a 30-year retirement timeframe. The rate reflects the worst-case scenario: What percentage of your starting retirement savings can you safely withdraw annually and adjust for inflation, without running out of money over three decades?

Of course, your retirement might last longer than 30 years, or you might have other income sources like Social Security or a pension. So while the safe withdrawal rate is a helpful baseline, it’s essential to tailor it to your unique situation.

2025 Safe Withdrawal Rate: The Headlines vs. Reality

The big headline from Morningstar this year is the reduction in the safe withdrawal rate from 4% in 2024 to 3.7% for 2025. On the surface, this seems like a cause for concern. Does this mean retirees must tighten their belts even more? Not necessarily.

Let’s consider the numbers. If you had $1 million on January 1, 2024, using the 4% rule, you could withdraw $40,000. However, the stock market performed well in 2024. For instance, the Vanguard Balanced Index Fund—a proxy for a diversified portfolio—saw gains of around 15%. So, by the start of 2025, your $1 million may have grown to $1.15 million. Using the new 3.7% rate, you could withdraw $42,550—an increase of over 5% compared to 2024.

This example highlights an essential point: The lower percentage doesn’t necessarily mean less income if your portfolio has grown. Morningstar deserves credit for adjusting their recommendations based on market conditions and portfolio valuations, ensuring retirees can make informed decisions.

Boosting Your Retirement Income

Morningstar’s report also outlines strategies to potentially increase your starting withdrawal rate. Here are two key recommendations:

1. Embrace Spending Flexibility

The traditional 4% rule assumes that retirees will withdraw the same inflation-adjusted amount each year, regardless of market performance. Morningstar suggests that greater flexibility in your spending can allow you to start with a higher withdrawal rate.

• Skip Inflation Adjustments: If the market is down, consider skipping your inflation-based raise for that year. This minor adjustment can make a significant difference in preserving your portfolio. With this strategy, you might be able to start with a withdrawal rate of 4.2%.
• Use Guardrails: Another approach is to implement guardrails—adjusting withdrawals based on market performance. For example, give yourself a raise when the market is up or reduce withdrawals slightly during downturns. This dynamic strategy could allow you to start with a withdrawal rate as high as 5.1%.

2. Incorporate Guaranteed Income

Adding guaranteed income sources to your retirement plan can also enhance your spending flexibility and security. Most retirees already have some guaranteed income through Social Security. Morningstar analyzed various scenarios, including:

• Social Security Timing: Taking Social Security early can reduce your lifetime spending capacity by up to 15%. On the other hand, delaying benefits until age 70—while using a “bridge” strategy with other savings—can increase your spending capacity by a similar margin.
• Annuities: Immediate or deferred annuities can provide additional guaranteed income, offering peace of mind and potentially boosting your overall spending.

A Holistic Approach to Retirement Planning

What I take away from Morningstar’s research is something I’ve told my clients for years: you need to have a comprehensive approach to retirement planning. Don’t rely on a single factor like the safe withdrawal rate. Instead, consider how your investments, Social Security, and other income sources work together. Flexibility and careful planning can make a significant difference in your retirement experience.

That’s why I created the Five-Step Retirement Income Plan—to help retirees navigate these complexities and make informed decisions. If you’d like to learn more, visit FiveStepRetirementIncomePlan.com.

Connect With Jeremy Keil:

• Mr. Retirement YouTube Channel
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