For three decades, the 4% rule has served as a cornerstone of retirement planning. The idea is simple: withdraw 4% of your portfolio in year one, then adjust that dollar amount for inflation each year thereafter. Follow this approach, and your money should last at least 30 years.
But in 2025, the rule’s creator has revised his recommendation upward to 4.7%, while other researchers argue the safe rate should drop to 3.7%. That one percentage point gap represents a $10,000 annual difference on a $1 million portfolio. Which number should you trust?
How the 4% Rule works
William Bengen, a financial planner, published his research in the Journal of Financial Planning in 1994. He analyzed market data going back to 1926, testing what would have happened to retirees who started withdrawing money at different points in history. His goal was to find a withdrawal rate that would have survived even the worst periods.
The answer was roughly 4%. A retiree using this rate would have made it through the Great Depression, the stagflation of the 1970s, and every other market calamity in the historical record. The rule caught on because it offered something rare in financial planning: a simple, research-backed starting point.
The mechanics are straightforward. If you retire with $1 million, you withdraw $40,000 in your first year. The next year, you adjust for inflation. If prices rose 3%, you withdraw $41,200. You continue this pattern regardless of what the market does, which provides predictable income but requires faith that your portfolio can absorb bad years.
Why Bengen now says 4.7%
Bengen has continued refining his research over the years. His original analysis used a simple portfolio of U.S. large-cap stocks and intermediate-term government bonds. In his 2025 book, A Richer Retirement, he expanded the model to include small-cap, mid-cap, micro-cap, and international stocks.
This additional diversification made a meaningful difference. Each asset class has its own cycle, and they don’t move in lockstep. When U.S. large-caps struggle, international or small-cap stocks may hold up better. According to Bengen’s updated analysis, this broader diversification raised the safe withdrawal rate from 4% to 4.7%.
It’s worth noting what his 4.7% figure represents. This is the worst-case scenario across all historical periods he tested. In most retirement periods, retirees could have withdrawn far more. The average sustainable rate across all scenarios was approximately 7%. But Bengen’s methodology is deliberately conservative: he builds the rule around surviving the worst possible timing, not the average outcome.
That worst case was retiring in the late 1960s and early 1970s. Retirees who started withdrawing money just before the stagflation era faced the most punishing combination: poor stock returns and high inflation simultaneously. Inflation forced them to withdraw ever-larger dollar amounts just to maintain their purchasing power, while their portfolios struggled to recover.
Why Morningstar says 3.7%
Not everyone agrees with Bengen’s optimism. Morningstar’s annual State of Retirement Income report recommends a more cautious 3.7% starting withdrawal rate. The difference comes down to methodology.
Bengen relies on historical backtesting. If a strategy survived every period since 1926, he considers it safe. Morningstar takes a different approach, using forward-looking projections based on current bond yields, expected stock returns, and inflation forecasts. Their models suggest future returns may be lower than historical averages, which would require a more conservative withdrawal rate.
Neither methodology is inherently right or wrong. Backtesting tells you what worked in the past. Forward-looking models attempt to account for how current conditions differ from history. The tension between them reflects a genuine uncertainty about what the future holds.
Lessons from lost decades
The debate matters because retirement portfolios are vulnerable to prolonged periods of poor returns, especially early in retirement. History offers sobering examples.
The 1970s delivered nominal returns of roughly 6% annually for U.S. stocks. That sounds acceptable until you account for inflation, which averaged around 7% during the decade. After adjusting for purchasing power, investors lost ground. Someone who retired in 1970 and followed a fixed withdrawal strategy watched their real wealth erode for an entire decade.
The 2000s were arguably worse. The S&P 500 delivered an annualized return of roughly negative 1% from 2000 through 2009. Investors endured two separate declines of more than 50%. Someone who retired at the market peak in 2000 faced a brutal sequence: their portfolio was cut in half, partially recovered, then cut in half again.
This is sequence of returns risk in action. The math of withdrawals works against you when markets fall early in retirement. You’re selling shares at depressed prices to fund your living expenses, leaving fewer shares to participate in any eventual recovery. A portfolio that might have lasted 35 years with good early returns could be exhausted in 20 years with bad ones.
Bengen himself identifies inflation as the greatest enemy of retirees. A bear market, while painful, typically recovers within a few years. But sustained inflation forces retirees to withdraw ever-larger amounts while their portfolios struggle to keep pace. The 1970s demonstrated how devastating this combination can be.
The lesson is not that stocks are too risky for retirees. Diversified portfolios fared better during both lost decades, and the long-term case for equities remains strong. The lesson is that averages can mislead. Markets do not deliver steady 7% returns each year. They lurch between boom and bust, and the timing of those lurches matters enormously when you’re drawing down a portfolio.
Flexible strategies can increase your rate
Both Bengen and the Morningstar researchers agree on one point: flexibility helps. A retiree willing to adjust spending in response to market conditions can afford to start with a higher withdrawal rate than someone committed to fixed inflation-adjusted withdrawals regardless of circumstances.
The simplest adjustment is skipping inflation increases after a bad year. If your portfolio drops 20%, you keep your withdrawal amount flat rather than increasing it for inflation. This small concession preserves more of your principal during downturns and gives your portfolio a better chance to recover.
More sophisticated approaches use guardrails. You set upper and lower bounds for your withdrawal rate. If a strong market pushes your rate below the floor, you give yourself a raise. If a weak market pushes your rate above the ceiling, you cut back. Morningstar’s research suggests that retirees using guardrails could start with a withdrawal rate as high as 5.1%.
The tradeoff is complexity and variable income. Fixed withdrawals offer predictability. You know exactly what you’ll have to spend each year. Flexible strategies require monitoring your portfolio and making adjustments, and your income will fluctuate with market conditions. For some retirees, that uncertainty is worth the higher starting rate. For others, predictability is worth the cost of a lower rate.
What this means for your retirement
The 4% rule was never meant to be a universal prescription. Bengen himself emphasizes that everyone’s situation is different. Your appropriate withdrawal rate depends on factors the rule doesn’t capture: your time horizon, tax situation, other income sources, spending flexibility, and tolerance for uncertainty.
A 55-year-old retiree planning for a 40-year retirement faces different math than a 70-year-old planning for 20 years. Someone with a pension covering basic expenses can afford more portfolio risk than someone depending entirely on investments. A retiree willing to cut spending during downturns has more options than one with fixed obligations.
The debate between 3.7% and 4.7% reflects genuine uncertainty, not a simple disagreement about math. Both figures rest on assumptions about the future that may or may not prove accurate. What matters more than picking the right number is understanding the tradeoffs and building a plan that accounts for your specific circumstances.
A personalized financial plan can stress-test your retirement against various scenarios, incorporating your income sources, tax situation, and spending needs. It can help you determine whether a conservative rate, an aggressive rate, or a flexible approach makes the most sense for your situation.
Wondering how these withdrawal rate strategies apply to your retirement? Our quick 4-question assessment helps determine if our approach aligns with your goals. Start here to see if we’re a good fit.
