Is the 4% Rule Still Relevant in 2025?

The 4% rule has been a cornerstone of retirement planning for decades, but is it still appropriate in today's economic environment? Let's examine this classic guideline and explore modern alternatives.

What is the 4% Rule?

The 4% rule, developed by financial planner William Bengen in 1994, suggests that retirees can safely withdraw 4% of their portfolio in the first year of retirement, then adjust that amount for inflation each subsequent year, with a high probability of not running out of money over a 30-year retirement.

For example, if you have $1 million saved, you would withdraw $40,000 in year one. If inflation is 3%, you'd withdraw $41,200 in year two, and so on.

The Research Behind the Rule

Bengen's research analyzed historical market data from 1926 to 1992, testing various withdrawal rates across different 30-year retirement periods. He found that a 4% initial withdrawal rate, with a portfolio of 50-75% stocks and 25-50% bonds, succeeded in all historical periods tested.

The "Trinity Study" (1998) by three professors at Trinity University further validated these findings, examining portfolio success rates across different asset allocations and withdrawal rates.

Challenges in Today's Environment

Lower Expected Returns

Current market valuations and bond yields are different from historical averages. Many financial experts believe future returns may be lower than the historical data used in the original 4% rule research, potentially making 4% too aggressive.

Longer Retirements

People are living longer, meaning retirement could last 35-40 years instead of 30. A longer time horizon increases the risk of portfolio depletion, especially if you experience poor returns early in retirement.

Sequence of Returns Risk

The order in which you experience investment returns matters significantly. Poor returns in the early years of retirement, combined with withdrawals, can permanently damage your portfolio's ability to recover.

Modern Alternatives and Adjustments

Dynamic Withdrawal Strategies

Instead of rigidly increasing withdrawals by inflation each year, dynamic strategies adjust spending based on portfolio performance. In good years, you might increase spending; in poor years, you might reduce it. This flexibility can significantly improve success rates.

The 3.5% Rule

Some researchers now suggest a 3.5% initial withdrawal rate may be more appropriate given current market conditions and longer retirements. While more conservative, this provides a higher margin of safety.

Guardrails Approach

This strategy sets upper and lower portfolio value guardrails. If your portfolio grows significantly, you can increase spending. If it declines below a threshold, you reduce spending. This balances flexibility with safety.

Bucket Strategy

Divide your portfolio into "buckets" based on when you'll need the money. Keep 1-2 years of expenses in cash, 3-10 years in bonds, and 10+ years in stocks. This helps you avoid selling stocks during market downturns.

Should You Use the 4% Rule?

The 4% rule remains a useful starting point for retirement planning, but it shouldn't be followed blindly. Consider it a guideline rather than a rigid rule. Your optimal withdrawal rate depends on:

Your age and expected retirement length
Your asset allocation
Current market valuations
Your flexibility to adjust spending
Other income sources (Social Security, pensions, etc.)
Your risk tolerance and desire to leave a legacy

Our retirement calculator models various withdrawal strategies and shows you the probability of success for different approaches. Use it to find the strategy that balances your income needs with long-term sustainability.