This is the withdrawal rate U.S. retirees need to start using in 2025, says a new report, and it’s shockingly low
Retirees, get ready: The golden rule of retirement withdrawals just became a reality. A new report from Morningstar recommends a safe withdrawal rate for retirees of just 3.7% by 2025, a significant change from the 4% rule that dominated retirement planning decades ago.
Amid rising costs, market volatility and a new outlook for inflation, lower interest rates could disrupt the way many retirees think about their financial strategies.
If you’re wondering what Morningstart’s updated baseline means for your golden years and whether you’ll have enough money to last 30-plus years into retirement, it’s time to dig into how to tweak your plan for success.
The safe withdrawal rate is the percentage of your retirement savings that you can withdraw each year without risking running out of funds prematurely.
The 4% rule has been the de facto standard for decades, giving retirees a simple formula for calculating how much of their savings they can withdraw each year to last for 30 years. (Remember: The safe withdrawal rate is not a law, but a recommended guideline for financial planners.)
The benchmark has drawn criticism in recent years from financial experts including Suze Orman, who say the rules have become a one-size-fits-all prescription that doesn’t take into account the diverse financial needs of retirees.
Orman said people who need a target should consider 3% to keep their money as long as possible, while financial adviser Bill Bengen, credited with setting the rule, now says the rate should be 4.7%.
The latest analysis from Morningstar points out that the new recommended interest rate is 3.7%, slightly lower than the 4% in 2024.
The downward Morning Star correction stems from a combination of economic and demographic factors:
Market Uncertainty: After years of market turmoil, including interest rate fluctuations and slowing growth forecasts, retirees face increasing investment risks.
Ongoing inflation: Although inflation has cooled somewhat since its peak in 2022-2023, it remains higher than pre-pandemic levels, making everyday spending more expensive.
Longevity Trend: Americans are living longer, which means retirees have to plan for more years of spending—perhaps 30 to 40 years after retirement.
These factors underscore the need to take a cautious approach to withdrawals, especially early in retirement when overspending can have long-term consequences.
To understand the best interest rate for you, start by understanding your retirement savings and expected expenses. Let’s say you’ve saved $900,000 for retirement.
Using the new 3.7% guideline, you can withdraw $33,300 per year. By comparison, the 4% rule equates to withdrawing $36,000 per year.
Now, compare this number to your expected annual expenses. If your expenses exceed the withdrawal amount, you may want to explore ways to cut costs, increase your income, or supplement your withdrawal with other savings or Social Security.
For retirees with a diversified portfolio, adjusting withdrawals to market conditions can also help preserve savings. For example, you might take out slightly more money in years when the market is doing well, and withdraw money during downturns to protect your principal.
Read more: Are you wealthy enough to be in the top 1%? Here’s the net worth you need to be among America’s richest, plus two ways to build a stellar portfolio
Adopting the right retirement strategy is critical for retirees to navigate today’s uncertain economic conditions. Here are some approaches to consider:
3.7% Rule: Stick to an updated safe withdrawal rate, which is recalibrated annually to account for changes in fees and portfolio performance. This conservative approach prioritizes long-term stability.
Bucket Strategy: Divide your assets into “buckets” based on short-term, mid-term, and long-term needs. For example, cash or bonds are for immediate expenses and stocks are for long-term growth.
Dynamic Withdrawals: Adjust withdrawals based on portfolio returns. Withdraw more in the right year; withdraw more in the right year; in bad economic years, reduce spending to extend the life of your savings.
Every strategy has its risks and rewards. The 3.7% rule provides simplicity and stable income, but may feel too restrictive for retirees with large savings or shorter life expectancies. Dynamic strategies offer flexibility but require careful monitoring and may not be suitable for people who prefer predictable income.
It may seem tempting to withdraw more than 3.7% per year, especially if you have substantial savings or have pressing financial needs.
But there are risks: Withdrawing too much in retirement can increase the likelihood of depleting your savings later—especially if market conditions worsen.
On the other hand, retirees with shorter life expectancies or with secure sources of income such as pensions may have a reason to increase their withdrawal rates.
For example, someone with $900,000 in savings and an annual pension of $30,000 could easily withdraw 4% to 5% of their savings without jeopardizing their financial future.
Lower safe withdrawal rates in 2025 are a wake-up call for retirees to reevaluate their financial plans.
If you’re approaching retirement or have already retired, consider reevaluating your budget to identify discretionary expenses that can be cut to reduce withdrawals. Explore part-time jobs, annuities or rental income to supplement savings.
A professional can help you develop a tailored withdrawal strategy that meets your goals and risk tolerance.
This article provides information only and should not be considered advice. It is provided without any warranty of any kind.
