The 5% Rule: Is It Time to Update Retirement Withdrawal Strategies?

For years, the "4% rule" has been the cornerstone of retirement planning—a simple guideline suggesting you can withdraw 4% of your retirement savings each year, adjusted for inflation, and not run out of money over a 30-year retirement. Lately, though, there's increasing discussion around the "5% rule." So what's changed, and is a higher withdrawal rate right for you?

A Quick Refresher: The 4% Rule

• With the 4% rule, if you have $1 million invested, you could start retirement by withdrawing $40,000 in your first year.
• Each year after, you increase that withdrawal to keep pace with inflation.
• Historically, this gave retirees a very high chance of making their money last for at least 30 years.

Why Are People Talking About the 5% Rule Now?

• Longer Bull Markets: Strong stock market growth in certain periods has led some to ask if higher withdrawals are possible.
• Flexibility in Retirement: Retirees often spend more in the early years and less later—averaging out to a higher "safe" withdrawal.
• Shorter Retirement Horizons: Those retiring later in life or planning for only 20 years might be able to withdraw more aggressively.
• Portfolio Choices: A higher stock allocation can sometimes support a slightly higher initial withdrawal rate.

The Trade-offs and Risks

• Longevity Risk: If you live much longer than expected, a higher withdrawal rate may leave you short on funds in old age.
• Market Risk: A steep market drop early in retirement (the dreaded "sequence risk") can lead to running out of money faster if withdrawing at a high rate.
• Unpredictable Expenses: Healthcare or unexpected costs can eat into your nest egg more than planned.

Dynamic Strategies: Beyond One-Size-Fits-All

Some modern planners suggest flexible rules:

• Start at 5% if markets are strong, but scale back to 4% (or lower) during downturns.
• Adjust withdrawals for lifestyle or health changes.
• Use "guardrails"—if your investments grow faster than expected, you can take more. If they shrink, cut back spending for a while.

Bottom Line: What's Right for You?

• The 5% rule may work for those with a shorter retirement, large safety margins, or willingness to reduce spending if markets stumble.
• The 4% rule remains a conservative benchmark for most retirees who want to maximize the odds of never running out of money.
• The best plan is personal: Run the numbers, be honest about your needs and year-by-year flexibility, and revisit your strategy as circumstances change.

Retirement planning is not about chasing a magic number—it's about matching your strategy to your goals, lifestyle, and peace of mind.