For decades, retirees were told to follow a simple rule: withdraw 4% of their savings each year to avoid running out of money. But new research, including updated analysis from the planner who created the rule, suggests some retirees may be able to safely withdraw closer to 5%.
That shift could mean retiring sooner, needing less savings, or feeling more confident about spending. However, experts say the reality is more nuanced than headlines suggest.
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What is the 4% rule
The 4% rule has long been a cornerstone of retirement planning. Developed in the 1990s, by Bill Bengen, it suggests you can withdraw 4% of their savings in the first year of retirement, then adjust that amount annually for inflation. The goal is to make a portfolio last about 30 years. While it was never meant to be a guarantee, the rule became a simple guideline many retirees and financial planners relied on.
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Why it changed
Recent research and updated market analysis have led some experts to revisit the traditional 4% rule. Mr. Bengen has stated that a slightly higher withdrawal rate can be sustainable under certain conditions. Broader diversification, improved portfolio management strategies, and evolving historical data all contribute to this reassessment. As retirement planning tools become more sophisticated, fixed rules are increasingly being viewed as starting points rather than permanent standards.
The new asset allocation recommendations
Previously, the asset allocation recommendation was a 50/50 split of stocks and bonds. However, Mr Bengen now states that the following asset allocation can allow for a safe withdrawal rate of 5%.
New allocation:
- 55% stocks
- 40% bonds
- 5% U.S. Treasury Bills
You can have a smaller nest egg
If you can safely withdraw closer to 5% instead of 4%, the amount of savings needed to retire may decrease. Traditionally, planners suggested accumulating roughly 25 times annual expenses. So if you need $60,000 to live, you would need a nest egg of $1.5 million.
However, a higher withdrawal rate could reduce that target, making retirement feel more achievable. If you can withdraw 5%, you'd only need 20 times your annual expenses. So you'd need to save $1.2 million to withdraw that same $60,000. A savings of $300,000.
For workers struggling to meet ambitious savings goals, this shift may offer psychological relief and practical flexibility. However, experts caution that lower savings targets should still be balanced with realistic risk expectations.
You may retire earlier
A higher safe withdrawal rate could shorten the timeline to retirement for some. If less savings are required to generate a sustainable income, you may reach financial independence sooner than expected. This possibility is especially appealing to those feeling burned out or eager to pursue lifestyle changes.
Still, retiring earlier can introduce new uncertainties, including longer exposure to market volatility and healthcare costs that must be carefully considered before making major decisions.
You can spend more in retirement
Many retirees underspend out of fear of running out of money. A higher withdrawal rate may give you the confidence to enjoy your savings more fully. This could mean traveling, helping family members financially, or investing in hobbies and experiences. While the psychological benefit of spending freedom is significant, experts emphasize that increased withdrawals should be closely monitored to avoid putting long-term financial security at risk amid unpredictable market conditions.
Market timing can make a big difference
The timing of retirement can significantly influence how long savings last. Retiring during a market downturn may force you to withdraw from declining portfolios, potentially locking in losses that reduce future growth. This concept, known as sequence-of-returns risk, becomes more important when withdrawal rates rise.
Even if a higher percentage appears sustainable on average, poor early market performance can make a retirement plan more vulnerable than many investors expect.
Investment mix plays a major role
Asset allocation remains one of the most important factors in determining sustainable withdrawal rates. Portfolios with higher stock exposure may support greater long-term growth but can also introduce volatility. Bonds and cash provide stability but may limit returns over time. A diversified mix can help balance these tradeoffs. As withdrawal assumptions evolve, experts increasingly stress that the structure of a portfolio often matters more than the specific percentage a retiree plans to withdraw.
Flexible withdrawal strategies are becoming more popular
Instead of sticking to a fixed withdrawal rate, many retirees now adjust spending based on market performance. Flexible strategies may allow higher withdrawals during strong market periods and more conservative spending when portfolios decline.
This approach can help extend the life of retirement savings while maintaining lifestyle satisfaction. Experts often recommend building guardrails into withdrawal plans so you can respond thoughtfully to changing economic conditions rather than relying on rigid rules.
Not every retiree should use a higher withdrawal rate
While the idea of withdrawing more each year is appealing, it may not be appropriate for everyone. Factors such as health care costs, debt levels, guaranteed income sources, and personal risk tolerance all influence how sustainable a higher withdrawal rate may be.
Some retirees also prefer the emotional security of more conservative spending. Experts stress that retirement planning decisions should reflect individual circumstances rather than broad trends or headlines.
How to decide what withdrawal rate is right for you
Choosing a withdrawal rate involves balancing lifestyle goals with long-term financial security. Reviewing projected expenses, stress-testing portfolios for downturns, and considering income from Social Security or pensions can provide clarity. Many retirees benefit from gradually adjusting withdrawals instead of making sudden changes. Working with a financial professional or using retirement planning tools may help households feel more confident about how much they can safely spend throughout retirement.
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