Retirees, brace yourselves: The golden rule of retirement withdrawals just got a cold dose of reality. A new report from Morningstar recommends the safe withdrawal rate for retirees in 2025 is a mere 3.7% — a significant adjustment from the decades-old 4% rule that had dominated retirement planning.
Amid rising costs, volatile markets and new prospects for inflation, a lower rate could disrupt the way many retirees think about their financial strategies.
If you’re wondering what Morningstart’s updated benchmark means for your golden years — and whether you’ll have enough to sustain a 30-plus-year retirement — it’s time to dig deeper into how you can adjust your plan for success.
What is the safe withdrawal rate for 2025?
A safe withdrawal rate is the percentage of your retirement savings you should be able to withdraw annually without risk of your money running out too soon.
For decades, the 4% rule was the de facto standard, offering retirees a simple formula for how much of their nest egg they could withdraw each year in order to make it last for 30 years. (Remember: the safe withdrawal rate is not law, but rather a suggested guide from financial planners.)
In recent years, the benchmark has come under fire from finance experts, including Suze Orman, who say the rule has become a cookie-cutter prescription that doesn’t account for retirees’ varied financial needs.
Orman says those who need a target should consider 3% to stretch their money as long as possible, while the financial adviser credited with coining the rule, Bill Bengen, now says the rate should be 4.7%.
Morningstar’s updated analysis points to 3.7% as its new suggested rate, down slightly from 4% in 2024. The adjustment reflects concerns about continued market volatility, the lingering effects of inflation and longer life expectancies.
Why has the rate dropped?
Morningstar’s downward revision stems from a combination of economic and demographic factors:
Market uncertainty: After years of market turbulence, including fluctuating interest rates and slowing growth projections, retirees face increased risks to their investments.
Persistent inflation: Although inflation has cooled somewhat since its peak in 2022-2023, it remains above pre-pandemic levels, making everyday expenses more costly.
Longevity trends: Americans are living longer, which means retirees must plan for more years of spending — potentially, 30 to 40 years in retirement.
These factors underscore the need for a cautious approach to withdrawals, especially in the early years of retirement when overspending can have long-term consequences.
How to calculate your safe withdrawal rate
Knowing what rate is best for you starts with understanding your retirement savings and expected expenses. Let’s say you’ve saved $900,000 for retirement.
Using the new 3.7% guideline, you’d withdraw $33,300 annually. By contrast, the 4% rule equates to withdrawing $36,000 annually.
Now, compare this number to your expected yearly expenses. If your spending exceeds your withdrawal amount, you may need to explore ways to cut costs, boost income or supplement withdrawals with other savings or Social Security.
For retirees with diverse portfolios, adjusting withdrawals based on market conditions can also help preserve savings. For example, in years when the market performs well, you might take out slightly more, while pulling back during downturns to protect your principal.
Withdrawal strategies for 2025
Adopting the right withdrawal strategy is crucial for retirees navigating today’s uncertain economic landscape. Here are a few approaches to consider:
The 3.7% rule: Stick to the updated safe withdrawal rate, recalibrating annually to account for changes in expenses and portfolio performance. This conservative approach prioritizes long-term stability.
Bucket strategy: Divide your assets into “buckets” based on short-, medium- and long-term needs. For example, cash or bonds for immediate expenses and stocks for long-term growth.
Dynamic withdrawals: Adjust withdrawals based on portfolio returns. In good years, withdraw more; in bad years, reduce spending to extend the longevity of your savings.
Each strategy has its risks and rewards. The 3.7% rule offers simplicity and a steady income but may feel too restrictive for retirees with large savings or shorter life expectancies. Dynamic strategies provide flexibility, but require careful monitoring and may not work for those who prefer predictable income.
Pros and cons of a higher withdrawal rate
Taking out more than 3.7% annually might seem tempting, especially if you have a substantial nest egg or immediate financial needs.
But there are risks: Withdrawing too much early in retirement increases the likelihood of depleting your savings later — particularly if market conditions worsen.
On the flip side, retirees with shorter life expectancies or guaranteed income sources, like pensions, may justify higher withdrawal rates.
For instance, someone with $900,000 saved and a $30,000 annual pension might comfortably withdraw 4% to 5% of their savings without jeopardizing their financial future.
Planning for success
The lower safe withdrawal rate for 2025 is a wake-up call for retirees to reassess their financial plans.
If you’re nearing retirement or already retired, consider reevaluating your budget to identify discretionary expenses you can trim to reduce withdrawals. Explore part-time work, annuities or rental income to supplement savings.
A professional can help you create a tailored withdrawal strategy that aligns with your goals and risk tolerance.
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