The Recommended Retirement Withdrawal Rate Dropped In 2025. Here's What It Means For Retirees

Between exploding housing, car, and utilities prices, finding a way to just get by in your everyday life can be more difficult than ever. Adding the need to save and plan for retirement on top of all of this can feel flat out overwhelming. While knowing exactly how much you might need during retirement can be tricky (coupled with the fact the amount Americans think they need to retire comfortably goes up every year) you might also need to rethink what your eventual withdrawals might be. Ensuring you have the right withdrawal calculation can fundamentally change the amount of money you need to save for retirement.

As a quick refresher, retirees generally select an annual withdrawal rate on their retirement savings funds. The widely accepted rule of thumb is that retirees withdraw 4% of their retirement account balance in the first year of retirement, and then continue to withdraw that same dollar amount adjusted for inflation every year. This rule is generally predicated on a 30-year retirement period. Retirees should apply this rule both to ensure they have the funds necessary to maintain their retirement lifestyle, and also to ensure their retirement savings are still there for the years ahead. However, the 4% rule might soon be a thing of the past, according to new report from financial services firm, Morningstar. As Susan Dziubinski, a Morningstar investment specialist, explained during a Morningstar segment alongside the report, "People embarking on retirement should think about slowing their rate of portfolio withdrawals in the year ahead."

The 4% withdrawal rule has existed for decades, so chances are good you might have already made your retirement plans based on that figure. However, according to Morningstar the new rate that retirees should use when calculating their withdrawal amounts is actually 3.7%. This new figure is based on higher equity valuations combined with lower bond yields. Both of these factors combined to bring down the capital assumptions (or anticipated returns) of major assets (including things like stocks, bonds, cash, and real estate). This means that retirees would need to essentially withdraw less money than normal in order to offset the lower returns of their retirement accounts. Hence, dropping the withdrawal rate from 4% to 3.7%.

As Christine Benz, Morningstar's director of personal finance and retirement planning, explained, this new recommendation is especially important, "if you are really concerned about never running out of money over your retirement time horizon." On the flip side, for those who are already retired this recommended rate change could be significant for those who might have simply set a withdrawal rate at the beginning of their retirement with the intention of never having to look at (or change it) again. It could be worth revisiting your current withdrawal schedule and considering an adjustment depending on your financial capabilities and your current retirement lifestyle. It's also important to recognize that Morningstar has recommended this rate change as of 2024, meaning you might have already taken out more than what could be sustainable for your retirement accounts.

As always, it's important to remember that any specific financial services provider or individual report could have a very different recommendation than another. Similarly, there is no entirely agreed upon withdrawal rate. Some financial experts actually prefer a 5% withdrawal rate, while others think a more conservative 3% is the safer choice. Ultimately this can depend on your financials and also your risk aversion level. Remember that your specific withdrawal rate is meant to ensure your annual withdrawals consist almost entirely of the interest and dividends of your retirement accounts (this assumes a solid rate of return, of course) so what that withdrawal percentage looks like can vary widely depending on your specific accounts.

Other factors that can and do factor into the right withdrawal percentage for you depends on both life expectancy and the age you actually retired. As bleak as that might sound, most reports and withdrawal recommendations are predicated on a 30-year retirement period, so retiring early (which can have some serious downsides) could mean your money needs to stretch even further. This could have a significant impact on your annual withdrawal amount plus it could affect just how much you need to save for retirement. With financially questionable economic policies expected over the next four years of Donald Trump's second term, it's safe to assume that market volatility will continue. Many of his proposed policies could also increase the chances of prolonged elevated inflation, meaning the recommended annual withdrawal percentage could decrease even further in the next few years.