The 4% Rule Is Outdated: Here’s What Actually Works for Retirement Income in 2025

By Murray Miller, Financial Strategist | RolloverRight.com

For thirty years, the 4% rule has been handed to retirees like a permission slip. “Withdraw 4% of your portfolio each year and you’ll be fine.” It’s clean. It’s simple. And for a lot of people retiring today, it’s dangerously incomplete. Let me explain why, and what actually works instead.

Where the 4% Rule Came From

In 1994, a financial planner named William Bengen sat down with decades of historical market data and asked a simple question: what’s the highest withdrawal rate that would have survived every 30-year retirement period in recorded history, including the worst ones?

His answer was 4.15%, rounded to 4%.

It was genuinely good research for its time. The so-called “Bengen study” became the foundation for nearly every retirement income conversation in America for the next three decades. Financial advisors repeated it. Retirement calculators were built around it. Magazine articles declared it gospel.

The problem is that 1994 was a long time ago. And the world your retirement will actually live in looks considerably different from the one Bengen was modeling.

What Has Changed Since 1994

Let me be specific, because this isn’t just vague hand-waving about “the world is different now.”

Life expectancy has increased significantly. Bengen built his model around 30-year retirements. Today, a healthy 62-year-old couple has a meaningful probability of one spouse living past 90. That’s potentially a 28 to 30-year retirement for one person, and the 4% rule was already cutting it close at 30 years. Push it to 32 or 35 and the math gets uncomfortable.

The interest rate environment has shifted. The original research was conducted during a period of relatively high bond yields. For much of the 2010s, bonds were returning almost nothing, which gutted the “safe” portion of a traditional balanced portfolio. Rates have come back up, but the era of reliably generous fixed income is not guaranteed to continue.

Healthcare costs have escalated at rates well above general inflation. The 4% rule doesn’t have a line item for a $180,000 long-term care event, a $40,000 year of out-of-pocket medical expenses, or the cumulative cost of medications over a 25-year retirement. These aren’t edge cases anymore. They’re planning assumptions.

Sequence of returns risk is more acute. I’ll dedicate a full section to this below, but the short version is: the order in which your returns arrive matters enormously. A bad market in your first five years of retirement is categorically different from a bad market in year fifteen, and the 4% rule’s historical survival rate doesn’t protect you from a particularly brutal early sequence.

The Number That Actually Matters More Than 4%

Here’s what I tell every client who walks in with a retirement portfolio and asks how much they can spend:

The withdrawal rate is almost the wrong question.

The right question is: what does your life actually cost, and how do we build a structure that reliably covers it?

I’ve worked with couples who could comfortably live on $60,000 a year but wanted $120,000 to fund the retirement they’d actually earned, travel, grandchildren, the lake house, the things they’d been deferring for decades. I’ve worked with executives who technically needed $200,000 a year in income but whose Social Security, pension, and other sources already covered $140,000 of it, leaving only $60,000 to draw from their portfolio.

In both cases, the raw percentage is almost meaningless without context. What matters is the gap between your guaranteed income and your actual spending, and how intelligently you close that gap. If your situation involves a pension election alongside your portfolio, the pension vs. lump sum decision will directly affect how much of that gap your portfolio needs to carry.

Download the Rollover Decision Brief to see how this framework applies to your specific numbers.

The Real Safe Withdrawal Rate in 2025: A More Honest Range

If you’re looking for a number, and most people are, here’s a more honest answer than a single percentage.

Depending on your portfolio construction, your retirement timeline, your spending flexibility, and market conditions at the time you retire, the genuinely sustainable withdrawal rate for most retirees today falls somewhere between 3.3% and 5.5%.

That’s a wide range, I know. But that range reflects real variation in real situations:

• A 70-year-old with a shorter planning horizon, guaranteed income covering most expenses, and a conservative portfolio might comfortably withdraw 5% or more
• A 58-year-old with a 35-year planning horizon, no pension, significant healthcare uncertainty, and a growth-oriented portfolio should probably think closer to 3% to 3.5%
• Most people in between land somewhere in the 3.8% to 4.5% range, close to the old rule, but with important caveats

The dangerous thing isn’t the 4% rule itself. It’s applying it without regard to which end of that range your situation actually calls for.

Sequence of Returns: The Risk That Can Break a Retirement the Rule Can’t Fix

Let me give you a concrete example of why the average return in your portfolio doesn’t tell the whole story.

Imagine two retirees.

• Both have $1 million.
• Both average exactly 6% annual returns over their 25-year retirement.
• Both withdraw $50,000 per year.

Retiree A experiences strong returns in the early years, up 18%, up 12%, up 9%, then has some bad years later.

Retiree B experiences the bad years first, down 22%, down 15%, flat, then strong returns later.

Same average return. Same withdrawal amount. Completely different outcomes. Retiree A finishes with a healthy portfolio. Retiree B runs out of money in year 19.

This is sequence of returns risk, and it’s the most underappreciated threat in retirement income planning.

Why does it matter so much? Because when you’re withdrawing money during a downturn, you’re selling shares at low prices, permanently removing assets that can’t participate in the eventual recovery. The damage compounds in reverse. And unlike a working investor who can simply wait out a bad market, a retiree making withdrawals doesn’t have that luxury.

The 4% rule’s historical survival rate assumes you experience average sequences. It doesn’t insulate you from a bad one. Learn more about how our retirement transition planning process stress-tests income plans against real market scenarios.

What Actually Works: The Three-Layer Income Structure

Over four decades of working with retirees, I’ve developed a framework that doesn’t depend on hitting a magic withdrawal number. It’s built around three layers of income that work together.

Layer One: The Income Floor

Before a single dollar moves, we identify exactly what your life costs, not just the basics, but the travel, the grandchildren, the lifestyle you spent decades earning the right to enjoy. That number is your floor. We fund it first.

The income floor is covered by guaranteed, non-market sources: Social Security, pensions, and in some cases certain types of annuities structured specifically for income. This layer doesn’t go down when the market does. It doesn’t require you to sell anything. It just arrives.

For most of the clients I work with, this layer alone can cover 60% to 80% of essential expenses. Getting Social Security timing right is often the single most valuable thing we do in this phase.

Layer Two: The Growth Engine

This is where your investment portfolio lives, and where most retirement income conversations start and stop. But notice it’s layer two, not layer one. That sequencing matters enormously.

Because your income floor is covered by guaranteed sources, your investment portfolio doesn’t have to perform perfectly every year. It doesn’t have to generate income in a down market. You’re not forced to sell in a crash. The portfolio can be structured for long-term growth with a time horizon measured in decades, which is exactly the horizon that allows it to recover from bad sequences and outpace inflation over time.

If you’re rolling over a 401(k) or pension lump sum into an IRA to fuel this layer, the 401(k) Rollover to IRA guide covers how to make that transition without triggering unnecessary taxes or penalties.

Layer Three: The Liquidity Reserve

This is cash and near-cash held specifically to cover 12 to 24 months of expenses, and to act as a buffer between you and your investment portfolio during market downturns.

If the market drops 30%, you don’t touch the portfolio. You draw from the reserve while it recovers. This simple structural move eliminates most of the sequence of returns risk I described above. You never have to sell low. You never have to panic. The reserve gives you time, and time is the most powerful asset in a recovery.

The Inflation Problem the 4% Rule Quietly Ignores

Here’s a thought experiment. If you retired in 2000 and took $60,000 a year from your portfolio, that same $60,000 in 2025 buys you roughly what $37,000 bought in 2000. Nearly 40% of your purchasing power, quietly evaporated.

The original 4% rule did account for inflation. Bengen adjusted withdrawals annually for CPI. But there are two problems with how this plays out in practice.

First, most people don’t actually adjust their withdrawals with that discipline. They set an amount and live on it, and inflation silently erodes what it buys.

Second, retiree inflation is structurally higher than general CPI because healthcare, which consumes a growing share of retirement spending as people age, inflates faster than almost everything else. So even diligent CPI adjustments tend to underestimate what a retiree’s actual cost of living does over 25 years.

The three-layer structure addresses this directly. The growth engine is specifically designed to outpace inflation over time. The income floor, if built correctly, includes inflation-sensitive components. The reserve gets replenished from portfolio gains during good years, not just from a fixed formula.

A Real Conversation I Had Last Year

A client came to me, a recently retired educator, 64 years old, $980,000 in a rollover IRA. Her previous advisor had given her the standard speech: withdraw 4%, you’ll be fine, here’s your asset allocation.

She’d done the math herself: 4% of $980,000 was $39,200 a year. Combined with her modest pension and Social Security, she figured she could make it work, but it would be tight. She’d given up on the travel she’d planned for thirty years.

When we actually built her income structure, coordinating the Social Security delay, timing the pension election correctly, creating a liquidity reserve, and designing the portfolio withdrawals to draw from the right accounts in the right order, her sustainable annual income came out to just over $67,000.

She’s been to Portugal twice. She’s going to New Zealand next spring. That’s not a magic trick. That’s what happens when you replace a percentage with a plan.

Find out if we’re a good fit and let’s look at what your actual numbers produce.

What to Do If You’re Within Five Years of Retirement

If you’re reading this and retirement is on the horizon, here’s what I’d encourage you to do, in roughly this order:

Get clear on your income floor. What will Social Security actually pay, and when? Do you have a pension? What does it produce under different election scenarios? If you’re weighing a pension payout against a lump sum, the pension vs. lump sum guide walks through exactly how to run that analysis. Add those guaranteed sources up. That’s your starting point.

Identify the gap. What does your life actually cost, the real number, including travel, healthcare assumptions, and the things you’ve been waiting to do? Subtract your income floor from that number. The difference is what your portfolio needs to cover.

Stress-test the gap.

• What happens to that gap if the market drops 25% in year two of your retirement?
• What if one of you needs long-term care?
• What if inflation runs at 4% instead of 2%?

These aren’t catastrophe scenarios. They’re planning assumptions.

Build the structure before you need it. The worst time to design a retirement income plan is the week you retire. The best time is two to three years before, when you still have flexibility to reposition, convert, and coordinate. Our retirement transition planning process is built specifically for this window.

Schedule a complimentary income blueprint session and let’s map this out together.

Key Takeaways

• The 4% rule was built on 1994 data and doesn’t account for longer life expectancies, healthcare inflation, or sequence of returns risk
• The real sustainable withdrawal range in 2025 is approximately 3.3% to 5.5%, where you fall depends entirely on your specific situation
• The withdrawal rate is almost the wrong question; what matters is building a structure that reliably covers what your life actually costs
• A three-layer approach, income floor, growth engine, liquidity reserve, eliminates most of the risks the 4% rule leaves unaddressed
• The best retirement income plans are built before you retire, not after

Frequently Asked Questions

1. If the 4% rule is outdated, why do so many advisors still use it?

Honestly? Because it’s simple, it’s defensible, and it requires very little customization. Telling a client “withdraw 4% and you’ll be fine” takes about thirty seconds. Building an actual income structure around their specific numbers, tax situation, Social Security timing, and spending reality takes considerably longer. The 4% rule isn’t wrong in every case. It’s just lazy as a universal prescription. The advisors I respect use it as a starting point for conversation, not a conclusion.

2. What if I’m more conservative and just want to withdraw 3% to be safe?

There’s nothing wrong with being conservative, but being overly conservative carries its own costs. I’ve worked with retirees who were so afraid of running out of money that they lived far below what their portfolio could actually support, forgoing experiences and opportunities they’d spent their whole careers working toward. Dying with $3 million when you could have lived on $2 million isn’t a success story. It’s a different kind of planning failure. The goal is accuracy, not maximum caution.

3. Does the 4% rule apply to Roth IRAs the same way it does to Traditional IRAs?

The mechanics are similar, but the tax treatment changes the effective purchasing power significantly. A 4% withdrawal from a Traditional IRA is pre-tax, you’ll owe income tax on it. A 4% withdrawal from a Roth IRA is tax-free. So a Roth withdrawal of $40,000 is meaningfully more valuable than a Traditional IRA withdrawal of $40,000 in the same year. This is one of many reasons that tax diversification, having both pre-tax and after-tax retirement accounts, gives you real flexibility in managing your income in retirement. The 401(k) Rollover to IRA guide covers how Roth conversion strategy fits into this picture.

4. How does Social Security timing interact with my withdrawal rate?

Enormously, and this is one of the most valuable levers in retirement income planning. Every year you delay Social Security past 62 increases your benefit by roughly 6% to 8%, up until age 70. For a retiree who delays Social Security from 62 to 70, the benefit can more than double. That higher guaranteed income directly reduces the amount your portfolio needs to produce, which means your effective withdrawal rate drops, your sequence of returns exposure shrinks, and your income floor becomes dramatically more robust. The math almost always favors delay for healthy retirees with sufficient assets to bridge the gap.

5. What’s the biggest mistake people make when trying to apply the 4% rule themselves?

Using their total portfolio balance as the starting point without accounting for taxes. If you have $1 million in a Traditional IRA and withdraw 4%, that’s $40,000 before tax. Depending on your bracket, you might net $32,000 to $34,000 after federal and state income taxes. Applying the rule to your gross balance and planning around the gross withdrawal amount leads to real shortfalls in actual spending power. Always model your retirement income on after-tax dollars. That’s the number that buys groceries, pays for travel, and funds the life you’re actually planning.

Murray Miller is a Financial Strategist with over 40 years of experience helping business owners, executives, military officers, healthcare professionals, and high-earning professionals build retirement income plans that hold. He has personally navigated the transition from accumulation to distribution and spent four decades helping others do the same.

Schedule a complimentary conversation to find out what your actual numbers support.