Retirees May Need to Recalibrate 4% Retirement Withdrawal Rule
The 4% rule, a popular retirement strategy for determining how much to withdraw annually from retirement accounts, may need to be revised for 2025. According to new research, the “safe” withdrawal rate has declined from 4% in 2024 to 3.7% in 2025 due to long-term assumptions in the financial markets.
The 4% rule suggests that retirees can withdraw 4% of their nest egg the first year, and adjust that amount upward for inflation each subsequent year. However, this formula is not flexible and does not account for changes in expenses, tax rates, or investment returns.
Retirees who are willing to be flexible with their annual spending may be able to deviate from the 4% rule. For example, reducing spending in down markets could help ensure that the savings last throughout retirement. History shows that the 4% rule is a reasonable starting point, but individuals should be prepared to make adjustments as needed.
Retirees can also adjust the 4% rule by taking into account the fact that they are likely to spend less in their later years. This means they can safely spend more in their earlier years and still have enough to last throughout retirement. Long-term care expenses, such as home health aides or nursing home care, should also be factored into the calculation.
Additionally, investors may be able to take advantage of market upsides by increasing withdrawals in strong years and reducing withdrawals in down years. Deferring Social Security claiming until age 70 can also boost financial security, as each full year of delay results in an 8% increase in monthly benefits. However, this requires individuals to have a plan for financing their living expenses between retirement and age 70.