Forget the 4% rule. Consider this new magic number for retirement withdrawals instead.
Some rules are meant to be broken.
The time-honored — and sometimes controversial — 4% rule suggests that a retiree should be able to withdraw 4% of their savings and investments in their first year of retirement and then adjust the dollar figure based on their updated balance every year thereafter. The theory is that this method gives people an excellent chance of not outliving their money.
That would mean that someone with $1 million in savings and investments who followed the 4% rule would be able to spend an inflation-adjusted $40,000 each year in retirement.
But in some years, that rule just doesn’t hold up.
Morningstar suggests in a new research report that retirees searching for a safe starting withdrawal rate should go no higher than 3.7%. That gives them a 90% probability of having some money remaining at the end of a 30-year retirement period.
Last year, Morningstar estimated 4% as the safe starting withdrawal rate. In 2022, the recommended rate was 3.8%, and in 2021 it was 3.3%.
The decrease in the withdrawal percentage compared with last year was due largely to higher equity valuations and lower fixed-income yields, which resulted in lower return assumptions for stocks, bonds and cash over the next 30 years, said Christine Benz, Morningstar’s director of personal finance and retirement planning.
The research comes on the heels of a strong year for the U.S. stock market. Year to date, the S&P 500 SPX is up 27%, the Dow Jones Industrial Average DJIA is up 16%, the Nasdaq COMP is up 34% and the Russell 2000 RUT is up 16%. Those returns have helped push up the number of “401(k) millionaires,” Fidelity reported.
While the 30-year inflation forecast has dropped to 2.32% from 2.42%, lower return expectations for stocks, bonds and cash more than offset the positive direction of the inflation forecast, Morningstar said in the report.
“Starting at 3.7% and given a 30-year time horizon from, say, age 65 to age 95, it would provide some leftover assets that you can use in case you live longer or in case you want to leave money to heirs,” Benz told MarketWatch.
The 4% rule originally comes from a 1994 study by financial planner William Bengen that appeared in the Journal of Financial Planning. That rule should be adjusted, however, when the markets outperform or underperform, Benz said.
“The best practice is to have flexible spending strategies. Spending can go up when the market outlook is good and down when the market outlook is lower,” Benz said. “It would help prevent retirees from overspending in periods of weakness, while giving them a raise in stronger markets.”
In addition to a flexible withdrawal strategy, retirees should also try to maximize their Social Security benefits by delaying the age at which they claim benefits in order to get the maximum monthly benefit, Benz said.
Retirees can claim Social Security starting at age 62, but benefits increase each year they wait, with 67 being the full retirement age for people born in 1960 or later, and the maximum benefit coming at age 70 for those who wait to claim.
Benz also added that retirees don’t spend the same amount every year, so withdrawal rates shouldn’t be rigid.
“People do not spend that way. When you look at actual spending, spending tends to decline over the retirement life cycle. It may start out strong but it declines steadily over time,” Benz said.
In this year’s study, Morningstar assumed a steady decline in inflation-adjusted household spending of 2% per year throughout retirement.
The forecasts for spending and for having enough assets to last 30 years don’t include long-term-care costs, however. Healthcare costs could throw a massive curveball into any retirement plan.
“Long-term-care costs later in life are the unknown — the elephant in the room,” Benz said. “The tricky part with long-term care is that half [of people] will need it and half won’t.”
To be safe, Benz recommends setting aside a long-term-care fund and keeping it separate from spendable assets.
“That gives you peace of mind. If you don’t use it, then it can go to heirs,” Benz said.
A 65-year-old retiring this year can expect to spend an average of $165,000 on healthcare and medical expenses during their retirement, up nearly 5% from a year ago, according to Fidelity Investments.
For some retirees, spending money after a lifetime of saving can feel uncomfortable. But worrying about spending rates is a fortunate problem to have, since not all retirees have savings to lean on, Benz said.
The average baby boomer’s 401(k) balance is $250,900, while the median balance is $67,000, according to Fidelity Investments.
Among Social Security beneficiaries age 65 and older, 12% of men and 15% of women rely on Social Security for 90% or more of their income, according to the Social Security Administration.
Social Security has an annual cost-of-living adjustment to help benefits keep pace with inflation, but for many retirees it’s not enough, according to the Senior Citizens League, an advocacy group.
The group expects the Social Security COLA to be 2.5% in 2026, the same as in 2025. But older adults are still having trouble keeping up with high prices, the Senior Citizens League said.
“While it’s great to see inflation cooling, that doesn’t mean seniors’ economic challenges are over. Years of inadequate COLAs have left older Americans behind,” said Shannon Benton, executive director of the Senior Citizens League.
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In a recent survey of 3,249 older Americans by the Senior Citizens League, 69% of respondents said they worry that persistent high prices will drive up their spending and cause them to deplete their retirement savings and other assets.
“We have two extremes in the country. There’s a segment that is quite undersaved in terms of retirement. And there’s the segment thinking about how to spend their money,” Benz said.
