Many older Americans saved a million dollars for retirement, followed the most popular withdrawal formula in personal finance, and now the math says you can spend just $40,000 of your own money in year one. That is the reality of the 4% rule, and for millions of Americans heading into their post-career years, that number feels uncomfortably small.
The formula has dominated retirement planning since the mid-1990s, offering a simple answer to a terrifying question: how much can you safely spend each year without outliving your savings? You take 4% in year one, adjust for inflation every year after, and trust that the math will hold for three decades.
But investment researchers have been picking that formula apart, testing modifications that could let retirees safely spend 5% or even 5.7% of their savings annually without running out of money.
The catch is that every tweak requires a trade-off, and understanding those trade-offs could mean the difference between a comfortable retirement and an unnecessarily tight one.
Morningstar pegs the safe withdrawal rate at 3.9% in its latest retirement income study
Financial adviser Bill Bengen created the 4% rule in 1994 as a straightforward formula for funding retirement over a 30-year horizon. Bengen tested how much a retiree holding a 50/50 mix of stocks and bonds could withdraw annually, and he found that a 4% starting rate survived even the worst historical market stretches, USA Today reported.
Morningstar’s December 2025 report, The State of Retirement Income: 2025, expands on Bengen’s original work and uses forward-looking return assumptions rather than purely historical data to calculate that a retiree can safely withdraw about 3.9% a year, adjusted for inflation, with a 90% chance the money will last 30 years.
The 4% rule is based on research that was trying to find the worst case among all retirees for the last 100 years. I think some retirees, a lot of retirees, should probably spend more
On a $1 million portfolio, that translates to just $39,000 in year-one spending, underscoring how lean the formula can feel in practice. The strength of the 4% rule is that it nearly guarantees you will not outlive your savings, but the downside is significant.
“The 4% rule is based on looking backwards at what type of withdrawal rate has worked in the past, and it’s based on a worst-case scenario,” Amy Arnott, a portfolio strategist at Morningstar, said.
The typical American near retirement has far too little saved for the 4% rule to work
If you follow the 4% rule to the letter, “in a lot of cases, you can end up with a pretty large amount of money left after you pass away,” Arnott noted. For some retirees focused on leaving a legacy or maintaining a large emergency cushion, that outcome is desirable, but for most households, it means years of unnecessarily restricted spending.
The 4% rule is a solid guidepost “if you want to build a legacy for your heirs, or if you want a really big emergency fund,” Robert Brokamp, a senior retirement adviser and financial planning expert at The Motley Fool, said.
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Among the 57% of 55-to-64 households that have any retirement savings at all, the median balance is about $185,000, according to the 2022 Federal Reserve Survey of Consumer Finances. Including the 43% of households with no retirement account, the picture is far bleaker.
Apply the 4% formula to $185,000, and a retiree gets just $7,400 a year from their portfolio, a figure that barely registers against the cost of living in most parts of the country.
Bengen himself continues to refine the formula, now working with a broader portfolio of seven asset classes and a slightly more aggressive allocation of 55% stocks, 40% bonds, and 5% cash.
Bengen proposed upgrading the withdrawal rate to 4.7% in his August 2025 book, A Richer Retirement. Bengen has since indicated that 4.7% itself is a worst-case figure. In a 2025 interview with Rethinking65, he said today’s retirees could likely safely withdraw ‘5¼, 5½%’ under current conditions, calling 4.7% ‘really very stingy spending.’
Five Morningstar-tested strategies that let retirees safely spend more
Morningstar’s report surveyed several modifications to the traditional withdrawal approach, and most of them allow retirees to spend a noticeably larger share of their savings each year in exchange for accepting some flexibility in how much they withdraw when markets shift up or down.
Alternative withdrawal strategies from the Morningstar report
- Actual spending (5% starting rate): This approach reflects research showing retirees generally spend less as they age, so you start at 5%, then reduce last year’s inflation-adjusted amount by 2% each subsequent year.
- Forgo inflation (4.3% starting rate): You follow the standard 4% formula but skip the inflation adjustment in any year your portfolio loses value, a simple tweak that provides a modest boost to year-one income.
- Guardrails (5.2% starting rate): You adjust spending based on market performance, giving yourself a 10% raise when your withdrawal percentage drops 20% or more below its initial level and taking a 10% cut when it climbs 20% or more above it.
- Constant percentage with floor (5.7% starting rate): You withdraw the same percentage of your portfolio each year, but spending never dips below 90% of what you withdrew in year one, preventing drastic income swings in down markets.
- Endowment method (5.7% starting rate): You smooth out spending volatility by basing withdrawals on a rolling average of your portfolio’s value, starting with a one-year snapshot and building toward a 10-year average over time.
Flexibility is the price retirees pay for higher withdrawal rates
The 4% rule was never meant to be a spending prescription; Bengen designed it as a worst-case safety net built from decades-old market data. Bengen himself now calls 4.7% the new “Universal Safemax” and has told interviewers that today’s retirees could likely withdraw between 5.25% and 5.5%. Morningstar’s December 2025 research reinforces that view, finding that retirees willing to stay flexible with their withdrawals could safely start at 5% or higher without depleting their savings over 30 years.
Morningstar portfolio strategist Amy Arnott noted that every alternative strategy unlocking more spending also introduces more variability bigger payouts in good years, and smaller ones when markets slide.
Robert Brokamp, senior retirement advisor at The Motley Fool, told the Motley Fool Money podcast that factors like health, other income sources, and personal risk tolerance all shape what makes sense for each household.
Morningstar’s analysis indicates the 4% rule still works as a safety net, but used as a spending cap, it can leave retirees underspending for decades and sitting on savings they never planned to leave behind.
Related: Retirees following 4% rule are leaving thousands on the table
