The 4% Rule for Retirement Withdrawals Gets an Upgrade
The 4% rule for retirement spending was created over 30 years ago. Things have changed since then. Here's how you can modernize the rule to fit your needs.
When financial adviser William Bengen invented the 4% rule for retirement planning, Beanie Babies were a hot collectible and the movie Pulp Fiction had just debuted. The rule provides a general guideline for how much to withdraw in retirement safely so you don't outlive your money. But that was in 1994, and it’s fair to ask whether his formula still holds up.
Here's how the 4% rule works. Let’s say you start with a $2.5 million portfolio. In your first year of retirement, you can withdraw 4% of your total balance or $100,000. That sets your baseline. The withdrawal amount increases with the inflation rate each year thereafter. If inflation is 2% in year two, you withdraw $102,000.
In theory, this formula means that "under a worst-case investment scenario, your savings should still last 30 years," says Karen Birr, manager of retirement consulting at Thrivent in Minneapolis. In practice, however, the formula may require adjusting because Bengen made several assumptions when he devised the rule that don’t always apply today.
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The 4% rule and markets
First, Bengen assumed that a retirement portfolio would be split approximately 50/50 between stocks and bonds, basing its return assumptions on historical market data from 1926 to 1976. "There are some issues with using historic returns," says Dan Keady, a certified financial planner and senior director of financial planning at TIAA in Charlotte, N.C. For one thing, bond interest rates were higher then (over 8%), whereas Keady says retirees today may need a higher stock allocation — up to 75% — to generate enough income.
Investing more in stocks in a bear market when the bottom seems nowhere in sight can be tough for retirees to stomach, so another option is to lower the 4% baseline withdrawal rate to "a little over 3%, maybe 3.3%," says Keady. This means you will need to either accept less income or save more for retirement. To generate the same amount of income at 3%, your portfolio would need to be 33% larger.
Bengen now says 4.7% might be a better starting rate
Recognizing that some retirees are too reluctant to spend down their principal, Bengen adjusted his recommendation for a first-year withdrawal rate of 4.7%, as outlined in his 2025 book, A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More. This approach assumes a 30-year horizon with a portfolio allocation of up to 65% equities, 30% bonds and 5% cash.
Morningstar's forward-looking advice: 3.9% for 2026
Unlike Bengen's research, which reviewed data dating back to 1926, Morningstar's research is forward-looking and targets a 90% success rate based on stress-test scenarios (or the Monte Carlo method). In recent years, Morningstar has advised new retirees to withdraw less than 4% to reduce their risk. This included research published in 2021 that recommended a 3.3% safe withdrawal rate (for 2022), and, in December 2025, research announcing 3.9% as the optimal rate for those retiring in 2026.
Longevity challenges the 4% rule
Bengen also assumed that retirement savings should last 30 years to account for longevity risk. Over time, however, life expectancies have risen, and today, savings may need to last 35, even 40 years. This, too, might imply lowering the 4% rate, though some financial advisers say that approach risks excessive austerity, especially if markets bounce back. "We commonly see people are so cautious with their spending, they end up with more money three to five years after retiring," says Sri Reddy, senior vice president for retirement and income at Principal Financial Group in Des Moines, Iowa.
"Having a surplus at the end of life is not a bad thing," says Birr. "Just make sure it’s something you want."
However, for some retirees, the "Die With Zero" rule may apply, encouraging them to spend and enjoy their money during their lifetimes.
If you’re worried about outliving your savings, Keady suggests transferring part of your portfolio to an annuity for guaranteed lifelong income. An annuity combined with Social Security should deliver enough income to cover essential needs, with the 4% rule applying to your investment portfolio for discretionary spending, like vacations and hobbies. In a bad year for investing, discretionary spending can be reduced without affecting the essentials.
Inflation can undermine a 4% approach
When Bengen created the 4% rule, inflation averaged a modest 2% to 3%. While it was recently at 3.8% as of April 2026, it had hit a more than 40-year high of 9.1% in June 2022. In a high-inflation environment, withdrawing more at the start of retirement to keep pace, particularly when the market is down, can throw retirement planning off track — an effect known as sequence-of-returns risk.
"Let’s say we have two years of 7% inflation," Keady says. Someone who started withdrawing $100,000 a year would be taking out $114,490 in year three. That’s hard to sustain, as you’ll continue to build off those higher-than-expected withdrawal rates.
One solution is the guardrails approach (PDF), or "Go Live Your Life" rule. Developed by financial planner Jonathan Guyton and computer expert William Klinger, this approach calls for reviewing your portfolio performance and inflation each year, and adjusting the withdrawal rate to match your target. If inflation pushes the baseline withdrawal rate up to 6% per year, scale it back.
If a bull market sends your portfolio balance soaring, you may be able to take out less than 3% or 4% with no change in lifestyle.
Once you turn 73 (or 75 if you were born after 1959), required minimum distributions (RMDs) from traditional IRA and 401(k) accounts may force you to withdraw more than you prefer. "The first-year RMD percentage starts at [roughly 3.8%] and increases as you get older," says Birr. Calculating your RMDs can be complex, so consult with a financial adviser if you need help.
Early retirement
If you are among the many people interested in retiring early or the FIRE movement (which stands for financial independence, retire early), the 4% rule may be too aggressive for your needs. Since your retirement will be much longer than average, you must plan early retirement withdrawal strategies for the long haul. And before you leap, consider that a sabbatical may be a smarter move than early retirement.
Don't forget about taxes and fees
Bengen's approach focused on the gross withdrawals from retirement or brokerage accounts. That assumption works well for those who are entirely invested in Roth accounts, where distributions of gains are not taxed as ordinary income. However, your withdrawal rate will need to account for the taxes you'll pay on a traditional IRA or traditional 401(k).
Bengen also did not factor brokerage or mutual fund fees into his model. So, if your financial adviser charges a 1% management fee, that will reduce your safe withdrawal rate by 1%.
Spending
Adjusting the withdrawal rate annually also addresses another Bengen assumption: that retirement spending rises linearly, when in fact it fluctuates.
Retirees tend to spend more in the early stages of retirement. "As they get older, spending usually slows down, before possibly picking up again for late-life health care costs," Reddy says. He prefers that clients allocate more funds initially and adjust their budget later if it appears they might run short. Remember, the 4% rule is only an estimate because everyone’s situation is different, Birr says. "Life events will happen, and you need to be flexible."
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