Is the 4% Rule for Retirement Still Valid in 2025?
If you’ve nerded out on retirement planning, you’ve probably heard of the 4% rule. It’s a seemingly simple guideline. Retire with a million dollars, withdraw $40,000 in your first year, adjust for inflation each year after, and you’re set for 30 years. But is this rule-of-thumb still relevant in 2025? Interestingly, Bill Bengen, the ‘father of the 4% rule’ back in the 1990s, recently released a new book called “Richer Retirement” where he suggests the 4% rule might actually be too conservative.
In this blog post, we’ll explore
- The background of the 4% rule
- Examine Bengen’s recent updates
- Discuss some downsides of following this rule too rigidly
- Provide practical approaches for your own retirement income planning.
Let’s dive in!
What is the 4 Percent Rule in Retirement?
The 4 percent rule was developed by Bill Bengen in the 1990s as a worst-case scenario approach to retirement withdrawals. Essentially, Bengen wanted to determine a safe withdrawal rate that would allow a retiree’s portfolio to last at least 30 years, even in the most challenging market conditions.
Through his research, Bengen back-tested various withdrawal rates using historical market data going back to 1926. What he discovered was fascinating. While many retirees could have started with much higher withdrawal rates, those who retired in the fall of 1968 (right before two bear markets and a period of high inflation in the 1970s and 1980s) needed to be more conservative.
The 4 percent rule works like this: In your first year of retirement, you withdraw 4% of your total portfolio. For example, if you have $1 million saved, your first-year withdrawal would be $40,000. In subsequent years, you adjust that amount for inflation. If inflation runs at 3% after your first year, you’d add $1,200 to your withdrawal, taking out $41,200 in year two, and so on throughout retirement.
This approach was designed as a worst-case scenario. In Bengen’s research, a portfolio with this withdrawal strategy would have lasted at least 30 years, even for those unfortunate 1968 retirees who faced particularly challenging economic conditions.
How the 4 Percent Rule Has Evolved: Bengen’s New Research
In his new book “Richer Retirement,” Bill Bengen has updated his research with some interesting findings. One key change is that he expanded the asset classes in his analysis.
The original 4% rule study used a simple portfolio allocation:
- 50% in S&P 500 (large-cap US stocks)
- 50% in intermediate treasury bonds (either 5-year or 10-year)
In his updated research, Bengen added several additional asset classes:
- Mid-cap stocks
- Small-cap stocks
- Micro-cap stocks
- International stocks
- Additional bond types
The results? That same 1968 retiree could have actually started with a 4.7% withdrawal rate and still had their portfolio last beyond 30 years.
Even more interesting, in recent interviews promoting his book, Bengen has suggested that withdrawal rates of 5.25% or even 5.5% could be reasonable starting points for today’s retirees. That’s a substantial increase from the original 4% guideline.
Why the 4 Percent Rule Has Limitations
While the 4 percent rule provides a helpful benchmark, there are several important limitations to consider before applying it to your own retirement planning:
It Ignores Other Income Sources
The 4 percent rule assumes your investment portfolio is your only source of retirement income. In reality, most retirees have multiple income streams, with Social Security being the most common.
For example, if you retire at 60 but delay Social Security until 70, you might need to rely more heavily on your portfolio during that 10-year “bridge period.” Your withdrawal rate might be higher initially (perhaps 6-7%). Once Social Security kicks in, your portfolio withdrawals could drop significantly.
Let’s say you need $100,000 annually and have $1.5 million saved. That’s a 6.67% withdrawal rate—well above the 4% guideline. However, if Social Security later provides $50,000 annually, you’d only need to withdraw $50,000 from your portfolio. Your withdrawal rate drops to just 3.33% (assuming your portfolio hasn’t depleted).
It Doesn’t Account for Tax Efficiency
The 4 percent rule assumes all your retirement assets are in tax-deferred accounts like 401(k)s or traditional IRAs. While this is common, many retirees today have a mix of account types:
- Tax-deferred accounts (401(k)s, traditional IRAs)
- Tax-free accounts (Roth IRAs, HSAs)
- Taxable brokerage accounts
By strategically withdrawing from different account types based on tax considerations, you can potentially increase your effective withdrawal rate well above 4% while maintaining the same after-tax income.
It’s Based on Retirement Spending Phases
The 4 percent rule assumes consistent spending throughout retirement, adjusted only for inflation. However, retirement spending typically follows three distinct phases:
- Go-Go Years: The early, active phase of retirement with higher discretionary spending on travel, hobbies, and bucket-list experiences.
- Slow-Go Years: The middle phase where activity levels and spending naturally decrease.
- No-Go Years: The later phase with limited mobility where spending on discretionary items decreases significantly.
A Morningstar study found that retirees’ spending typically lags inflation by about 1% per year. This means your spending power might naturally decrease over time. This pattern could allow for higher initial withdrawal rates that gradually decrease.
It Uses a Conservative Asset Allocation
The original 4% rule was based on a 50/50 stock/bond allocation, which Bengen considered the minimum acceptable stock percentage. In his research, portfolios with 75% stocks and 25% bonds often supported initial withdrawal rates of 5%, 6%, or even higher.
Your risk tolerance and capacity should guide your asset allocation. If you’re comfortable with more equity exposure (60/40 or 75/25), you might safely support a higher withdrawal rate.
It’s Based on Worst-Case Scenarios
Perhaps most importantly, the 4 percent rule is based on the worst retirement timing in modern history. The average safe withdrawal rate across all the historical periods Bengen studied was actually 7%—not 4%.
This means most retirees following the 4% rule not only preserved their principal but significantly increased their wealth throughout retirement. While having a backup plan for worst-case scenarios is prudent, planning your entire retirement around the worst possible outcome might lead to unnecessary sacrifice during your go-go years.
Practical Approaches to Retirement Income Planning
So how should you approach retirement income planning given these insights? Here are some practical strategies:
Use the 4.7% Rule as a Benchmark, Not a Rule
The updated 4.7% guideline should be viewed as a starting point, not a rigid rule. Compare your planned initial withdrawal rate to this benchmark. If you’re significantly higher (like 10%), that might be a red flag. But if you’re at 5.5-6% with Social Security starting in a few years, you’re likely on solid ground.
Optimize Your Tax Efficiency
Consider the timing of your distributions from different account types. For example, the period between retirement and age 75 (when Required Minimum Distributions begin) presents a potential “Roth conversion window” where you might be in lower tax brackets.
Strategically converting some tax-deferred assets to Roth during these years can potentially reduce your lifetime tax bill and enhance your legacy if that’s important to you.
Balance Risk Tolerance with Risk Capacity
Determine both how much risk you need to take (risk capacity) and how much risk you’re comfortable taking (risk tolerance). If your retirement is well-funded, you might not need to take on as much market risk, even if that means a slightly lower withdrawal rate.
Consider your different “buckets” of money and their time horizons:
- Near-term spending money (more conservative allocation)
- Mid-term money (moderate allocation)
- Long-term/legacy money (more aggressive allocation)
Just be careful about overloading bonds in taxable accounts, as this can create tax drag on your returns.
Consider a Guardrails Approach
The “guardrails” strategy, developed by Guyton and Klinger, offers more flexibility than the static 4% rule. It allows for a higher initial withdrawal rate (perhaps 5-5.5%) with rules for when to reduce spending if your portfolio performs poorly or increase spending if it performs well.
This approach can be particularly valuable if you’re retiring early with a longer time horizon. It can also help if you’re borderline funded but don’t want to sacrifice your go-go years.
Develop a Long-Term Care Plan
Long-term care costs can derail even the best retirement income plan. About 70% of retirees will need some form of care in their later years. Without a specific plan for these costs, many retirees underspend throughout retirement out of fear.
Strategies you may consider include:
- Insurance
- Self-funding
- A combination approach
Having a dedicated strategy for potential care needs is essential. It can also give you more confidence to spend and enjoy your early retirement years.
Is the 4% Rule Dead?
So, is the 4 percent rule outdated retirement planning advice? Not exactly. It remains a useful benchmark. The better question might be:
Should we make it the 7% rule, given that was the average experience across all historical periods?
The answer depends on your personal circumstances. Starting with a higher withdrawal rate early in retirement (perhaps 6-7%) and then reducing it once Social Security begins could be a reasonable approach for many retirees.
Remember that no one can predict the future. The key is having a disciplined, unemotional, and repeatable process for managing your retirement income—not just at the beginning of retirement, but throughout your retirement journey.
Final Thoughts
Retirement planning isn’t one-size-fits-all. While the 4% rule retirement strategy provides a helpful starting point, your personal retirement income plan should consider your unique circumstances, including:
- The timing of different income sources
- Tax efficiency across various account types
- Your spending patterns and priorities
- Your risk tolerance and capacity
- Your legacy goals
- Your long-term care strategy
By taking a more nuanced approach to retirement income planning, you can potentially enjoy a richer retirement without sacrificing long-term security.
Remember, the goal isn’t to die with the biggest possible portfolio—it’s to use your resources to live your best life while ensuring you don’t outlive your money. With thoughtful planning and regular reassessment, you can strike that balance and enjoy the retirement you’ve worked so hard to achieve.
This is for general education purposes only and should not be considered as tax, legal or investment advice. At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions.
If you are looking to maximize your retirement spending, minimize your lifetime tax bill, and worry less about money, you can start with our Retirement Readiness Questionnaire linked on our website at www.imaginefinancialsecurity.com. Click the “Start Now” button to learn more about our process and how we might be able to help you achieve a more confident retirement.
Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.
