Personal Finance

Say Goodbye to the 4% Rule. Experts Now Think is a Safe Withdrawal Rate

Christy Bieber

Published: December 13, 2024 8:32 am

If you’ve ever read anything about retirement, chances are good you have heard of the 4% rule. This “rule” isn’t really a rule of course, but is a guideline that was created by looking at historic stock market performance. It’s often used by financial planners to offer guidance on how much you can safely withdraw from a retirement account without risking running out of money for 30 years.

Key Points from 24/7 Wall St.:

• The 4% rule is a longstanding rule that says you can withdraw 4% of your retirement account balance in retirement.
• Morningstar analysts announced on December 11 that the 4% rule is no longer conservative enough.
• The new recommendation is to keep withdrawals to 3.7% to have a 90% chance of your retirement money lasting for life.
• Also: Take this quiz to see if you’re on track to retire (Sponsored).

The 4% rule says you could withdraw 4% of your account balance when you first retire, then adjust the amount each year to account for the impact of inflation. If you followed this guideline, you could usually feel pretty confident your money would last at least 30 years.

Things are changing now, though. Morningstar’s new research on retirement spending says you’ll have to be a little more conservative if you want your money to last.

Here’s the new rule for seniors to follow if they don’t want to end up broke in their later years.

The 4% rule becomes the 3.7% rule

According to Morningstar’s 2024 research on retirement spending, updated data suggests that retirees should cap their first-year withdrawals at 3.7% of their portfolio balance instead of 4.00%.

Morningstar’s analysts have made this adjustment to reflect “the effects of higher equity valuations and lower fixed-income yields, which have led to reduced return expectations for stocks, bonds, and cash over the next 30 years.”

In other words, analysts believe you are going to make less money on your investments, so you can’t afford to spend as much without risking running out of money.  This is a change from last year when Morningstar’s Analysts believed the long-standing 4% rule still held up. It means that if you want a 90% success rate (or a 90% chance you won’t go broke), you’d need to adjust down to the more conservative estimate.

Should you adjust your retirement spending?

The new 3.7% rule would leave you with less cash to spend in your later years, so determining whether to reduce your withdrawals can be a big decision. If you had a $1 million nest egg, for example, it would produce just $37,000 for you instead of $40,000. When you’re already on a fixed income, that’s a big hit to take. Still, running short of money in your 80s or 90s would be a far worse outcome.

Ultimately, the best approach is to consider what’s right for you, given the specifics of your situation. The new 3.7% rule (or the old 4% rule) is an overly simple approach to the complex question of how to make your money last when the best approach is to develop a personalized plan — often with the help of a financial advisor — that takes into account your risk tolerance, likely longevity, and other income sources.

If you want to take this simple shortcut and apply a generic rule, then you’re likely better off erring for the more conservative estimate because the stakes are so high when it comes to running out of money. While you may shortchange yourself a bit and have to be a little tighter with your budget, you’re going to be far happier with extra money you can leave behind for your heirs than if you end up struggling to live on Social Security alone because your accounts have run dry too soon.