Safe withdrawal rate in retirement increases with more flexible approach
The 2025 Morningstar State of Retirement Income looks to the future to explore safe withdrawal rates.
Providing for retirement is the great unifier in the investing world. It is a challenge that all investors face.
While approaches will vary, at some point, each investor is faced with the need to convert a lump sum of money into an annual outlay to pay for day-to-day life.
Take too much out and you may run out of money before the unknowable date your retirement ends—otherwise known as death.
Take too little out and spending your golden years subsisting on white bread will lead to your kids eating caviar.
This quandary has led to countless products and employed an army of accountants and advisers ready to dissect each new set of government rules and regulations. And it has spawned one of the most famous and misunderstood axioms in personal finance—the 4% rule.
The reason the withdrawal rate matters is because it dictates the size of a portfolio needed to support certain spending levels. I covered this recently in an article on the 4 steps to calculate how much you need for retirement.
While it can be considered a good starting point, the 4% rule shouldn’t be seen as a hard and fast rule, as revealed in a new retirement report by Morningstar.
What is the 4% rule
The 4% rule is an attempt to find a safe withdrawal rate that will address sequencing risk and longevity risk while maintaining an inflation adjusted standard of living which increases the original withdrawal amount by inflation each year.
Put simply, it is supposed to protect you from the misfortune of retiring when markets are falling (sequencing risk) while making sure you don’t outlive your savings (longevity risk).
The 4% rule is not a substitute for minimum drawdowns from Super, which were never intended to represent a “safe” withdrawal rate and are not a mandate to spend the money you’ve taken out of a tax advantaged account.
Based on a study in the early 1990s by a US financial planner named Bill Bengen, the 4% rule is ultimately a rule of thumb using historical data to try and provide answers for a future that is unique to you.
Ironically, that ‘rule of thumb’—crafted more than 30 years ago—directly contradicts the disclaimer that ASIC and every other regulator in the world requires to accompany all mentions of investment returns… past performance is not indicative of future performance.
While the simplicity of the rule supports widespread adoption, the 4% rule is not based on the unique time you will retire, nor the unique retirement you will live. It is a jumping off point for further analysis.
A better way to view withdrawal rates
Our finances are deeply personal. The most important determinant of achieving your ideal retirement are inputs that only you can provide.
The 2025 Morningstar State of Retirement Income Report is intended to represent a safe withdrawal rate for someone retiring today, while simultaneously allowing adjustments based on your personal circumstances.
The report incorporates long-term estimated returns that are based on the current environment.
Morningstar’s 2025 retirement income research suggests that 3.9% is the highest safe starting withdrawal rate for retirees seeking a consistent level of inflation-adjusted spending from year to year, assuming a 90% probability of having funds remaining at the end of an assumed 30-year retirement period .The report incorporates forward-looking asset-class return and inflation assumptions to arrive at a starting safe withdrawal rate for new retirees, excluding government benefits or other nonportfolio income sources.
Our “base case” safe withdrawal rate is up slightly from the starting safe withdrawal percentage of 3.7% we estimated in last year’s report. (The base case estimates for starting safe withdrawal rates for a new retiree with a 30-year horizon with a 90% probability of success were 3.3% in 2021, 3.8% in 2022, and 4.0% in 2023.) However, these numbers aren’t meant to imply that people who are already retired should shift their spending up or down from year to year; rather, they represent our best estimate of the starting safe withdrawal rate for a person currently embarking on retirement.
In addition, new retirees don’t have to settle for such a low number—and arguably shouldn’t. Our research concluded that those who are willing to tolerate some fluctuations in their spending can start with a withdrawal rate of nearly 6%. The right level of flexibility in a retiree’s spending system will depend on the individual’s tolerance for spending changes, including the extent to which fixed expenses are covered by nonportfolio income sources.
As shown in the table below, we estimate that a new retiree planning for a 30-year time horizon can safely withdraw 3.9% of a portfolio with an equity weighting of between 30% and 50%. Because of the higher volatility associated with higher equity weightings, boosting stocks detracts from the starting safe withdrawal percentage rather than adds to it. The below table also shows the connection between time horizon, asset allocation, and safe withdrawal rates, indicating that older retirees can reasonably spend well more than the 3.9% in our base case, which assumes a 30-year horizon.
We also explored the role of market, inflationary, and spending shocks such as early retirement in this year’s research. We found that retirees who encountered poor returns in the first five years of retirement and didn’t adjust their spending downward were much more likely to exhaust their savings than those who came through the first five years with positive returns. Similarly, we concluded that retirees who encountered high inflation early in retirement were also more likely to prematurely run out of funds unless they took steps to adjust their savings.
The State of Retirement Income report has detailed explanations on a variety of approaches to future withdrawals and the impact that they have on the longevity of your retirement savings.
Success in investing often comes down to being thoughtful. Retirement planning is no difference. Can you put off retirement if it isn’t a good market environment? Can you set yourself up for success by adjusting your asset allocation and savings in the years proceeding retirement? What factors will influence the amount you need to spend in retirement? Most of us get one shot at getting this right. Time to do some homework.
Get Morningstar’s insights in your inbox
Resources mentioned:
