4% Rule for Retirement: Is It Still Safe in 2025?

What the 4% Rule Really Means

Imagine you retire with $1 million saved. The 4% rule says you can take out $40,000 in your first year. Next year, you adjust that amount for inflation-say, 3%-so you withdraw $41,200. The year after, another 3% bump, and you’re taking $42,436. You keep doing this every year, no matter what the market does. The idea is simple: if you follow this pattern, your money should last 30 years-or longer.

This rule wasn’t pulled out of thin air. In 1994, financial planner William Bengen looked at 75 years of U.S. market data-from 1926 to 1995-and tested every possible combination of stock and bond allocations. He found that withdrawing 4% of your starting balance each year, adjusted for inflation, worked in 95% of historical scenarios. That’s why it stuck. By the late 90s, the Trinity Study confirmed it. Suddenly, every financial advisor, magazine, and retirement seminar was pushing the 4% rule as gospel.

How It Actually Works (With Real Numbers)

Let’s say you retire on January 1, 2025, with $850,000 in your 401(k) and IRA. Your first-year withdrawal is 4% of that: $34,000. You pay taxes on it-since it’s from tax-deferred accounts-and you use the rest to cover living costs.

Fast forward to 2026. Inflation hits 3.2%. You bump your withdrawal to $35,088 ($34,000 × 1.032). In 2027, inflation drops to 2.1%, so you take $35,824. You don’t check your portfolio balance each year. You don’t panic if the market dips. You just keep taking your inflation-adjusted number.

This works best if your portfolio is split roughly 50/50 between stocks and bonds. That mix gives you growth from equities and stability from fixed income. It’s not about picking winners-it’s about balance. The rule assumes you’re not relying on Social Security or a pension to cover all your needs. If you are, you might be able to withdraw less. If you’re not, you might need to go lower.

Why the 4% Rule Is Riskier Today

Here’s the problem: the world changed. When Bengen tested his rule, bond yields were around 6-8%. Today, they’re hovering near 4.3%. That’s not terrible, but it’s not the high returns retirees used to count on. Stocks? The Shiller P/E ratio-the market’s valuation gauge-is at 30.5. That’s higher than before the 2008 crash and near the peak of the dot-com bubble.

Higher valuations mean lower future returns. Lower bond yields mean less cushion when markets drop. In 2024, Vanguard’s research showed that under today’s conditions, a 4% withdrawal rate has only an 82% chance of lasting 30 years-not 95%. That’s a big drop.

And then there’s inflation. The 1970s taught us that inflation doesn’t just creep up-it can spike. If you retire during a period of 5%+ inflation, your withdrawals grow fast. Your portfolio has to grow even faster to keep up. If it doesn’t, you’re draining your savings faster than you think.

The Real Danger: Sequence of Returns Risk

Here’s the quiet killer most people don’t talk about: sequence of returns risk.

Let’s say you retire in 2025. The market drops 20% in your first year. Your $850,000 drops to $680,000. But you still take your $34,000 withdrawal. That’s 5% of your new balance. You didn’t reduce spending. You didn’t pause. You just kept going.

Now, you’ve locked in a loss. You’re selling assets low to fund your lifestyle. That makes it harder for your portfolio to recover-even if the market bounces back. A 2023 study from the Journal of Financial Therapy found that 68% of retirement failures happen because people withdrew too much in the first five years during a market downturn.

This is why the 4% rule feels safe on paper but can feel dangerous in real life. It doesn’t adapt. It doesn’t flinch. It just keeps going.

What the Experts Are Saying Now

William Bengen himself no longer says 4% is the magic number. In his 2024 update, he calls 4.7% the new “universal SAFEMAX” for retirees starting in 2024-with a 50/50 portfolio. But he adds a twist: for every point the Shiller P/E ratio goes above 25, you should reduce your withdrawal rate by 0.1%. At today’s 30.5, that means dropping from 4.7% to 4.15%.

Wade Pfau, a top retirement researcher, says 3.3% is safer today. He’s not being pessimistic-he’s being realistic. With low bond yields and high stock prices, the odds of a 30-year retirement succeeding at 4% are slipping.

Michael Kitces, another leading voice, doesn’t throw out the 4% rule. He improves it. He suggests “guardrails.” If your portfolio drops 20%, cut your withdrawal by 10%. If inflation hits 5%, only increase your withdrawal by 2.5%, not 5%. That small flexibility boosts success rates from 95% to 98%.

What Works Better Than the Basic 4% Rule

Here are three smarter approaches that build on the 4% rule instead of replacing it:

1. Guardrail Strategy: Start at 4%, but set rules. If your portfolio drops more than 20%, reduce spending by 10%. If inflation spikes, raise withdrawals by only half the rate. This is what 45% of financial advisors are doing in 2025.
2. Bucket System: Divide your money into three buckets. Bucket 1: 2 years of cash for living expenses. Bucket 2: 5-7 years in bonds. Bucket 3: the rest in stocks. You only tap Bucket 1 each year. When it’s low, you refill it from Bucket 2-never from Bucket 3 during a crash.
3. Dynamic Withdrawal Based on Bond Yields: Vanguard’s 2024 model says: for every 1% increase in 10-year Treasury yields above 2%, add 0.5% to your safe withdrawal rate. At 4.3% yields, that gives you 4.15%-not 4%. That’s not a guess. That’s math.

Another powerful tool: annuities. Converting 20-30% of your savings into a lifetime income annuity gives you a guaranteed paycheck. That means you can be more aggressive with the rest. Retirees who use this combo report 27% higher confidence in their long-term security.

When the 4% Rule Still Makes Sense

It’s not dead. It’s just not one-size-fits-all.

The 4% rule works best if:

• You have a balanced portfolio (40-60% stocks)
• You can cut back on vacations, dining out, or home improvements if needed
• You have Social Security or a small pension covering 40-50% of your essential expenses
• You’re retiring in a low-inflation environment
• You’re not planning to live past 90

If you’re in your mid-60s, healthy, and have $1.2 million saved, the 4% rule is still a solid starting point. But if you’re 70, have $600,000, and no pension? You need to go lower. Much lower.

What to Do Right Now

Don’t just lock in 4%. Do this instead:

1. Calculate your true retirement number. What do you actually spend each month? Add in healthcare, insurance, taxes. Don’t guess. Track it for 6 months.
2. Check your portfolio. Is it really 50/50? Or are you 80% in stocks because you’re scared of missing out? Rebalance if needed.
3. Build a cash buffer. Keep at least 2 years of living expenses in cash or short-term bonds. That way, you never have to sell stocks during a crash.
4. Delay Social Security. Waiting until 70 increases your benefit by 8% per year after full retirement age. That’s like getting a 100% guaranteed return. It lets you withdraw less from your savings early on.
5. Plan for RMDs. Starting at age 73, the IRS forces you to withdraw more each year. In 2025, that’s 3.77% of your balance. By 80, it’s over 5%. If you’re already withdrawing 4% at 65, you’ll be forced to take even more later. That can burn through your savings fast.

Final Thought: It’s a Framework, Not a Rule

The 4% rule gave people a simple answer when retirement planning felt overwhelming. But today, simplicity isn’t enough. The market doesn’t care about your plan. It moves. Inflation doesn’t wait. Health costs don’t follow a schedule.

What you need isn’t a rule. It’s a system. One that lets you stick to your plan but bend when the world bends. The 4% rule still has value. But only if you treat it like a compass-not a map.