For decades, retirees worried about running out of money have heard some reassuring advice: Stick to withdrawing 4% of your savings every year, and you are very unlikely to spend down your whole investment portfolio over a 30-year retirement.
But a recent report is casting doubt on that pearl of financial wisdom.
Researchers at Morningstar now say 3.7% is the highest safe starting withdrawal rate if you want at least a 90% probability of not running out of funds over three decades.
Going into 2024, Morningstar said it backed the notion that withdrawing 4% annually was a safe bet. But it is now lowering that number to 3.7% for 2025 as a result of a combination of slightly lower yields on bonds and the higher stock returns of recent years, which suggest that future returns for stocks might be lower.
The current 3.7% suggestion is also a dip from the 3.8% Morningstar cited going into 2023. However, it’s higher than the 3.3% recommendation for 2022.
Financial planner William Bengen is credited with inventing the 4% rule in 1994. Bengen’s research found that over every rolling 30-year period since 1926, retirees with a portfolio of 50% stocks and 50% fixed-income securities could have withdrawn an annual amount equal to 4% of their original assets without running out of cash.
Under Bengen’s scenario, the amount withdrawn each year also was adjusted for inflation.
Ironically, Bengen said a few years ago that he believed his original 4% rule was overly cautious. He added that retirees likely can safely withdraw up to 4.5% of their portfolios annually.
If you want to safely maximize spending in retirement, Morningstar suggests following some alternative strategies, such as delaying Social Security, setting up a laddered portfolio of Treasury Inflation-Protected Securities (TIPS), or buying an annuity.
For more pearls of financial wisdom that you might want to question, check out “7 Pieces of Common Money Advice That Can Cost You.”
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