New Year, New You, New Withdrawal Rate

What is a safe withdrawal percentage I can take from my portfolio this year?

This time of year, many people look forward to the fresh start a new year can bring. Many of us set resolutions focusing on quitting bad habits like smoking, avoiding junk food, or reducing screen time. Others aim for self-improvement, like eating healthier, going to the gym more often, or reading more books. Some even contemplate significant lifestyle changes to turn the page after a difficult year or simply because they’re ready for a new challenge. As we plan for the New Year and what we hope to achieve, we also review our financial goals, which may involve setting a budget and spending rate for those living off their investment accounts.

For retirees or those new to retirement, uncertainty about how much they can spend from their investments can create anxiety, especially after a year where markets or economic factors like inflation had a negative impact. Conversely, after two consecutive years of stock market performance above historical norms, some retirees are feeling bold and looking to spend more thanks to larger asset base. This is when many clients ask about a safe withdrawal amount, hoping for a clear and confident answer.

Seeking a rule of thumb for a safe retirement withdrawal rate isn’t a new concept in the financial planning industry. In the early 1990s, advisor William Bengen published a study in the Journal of Financial Planning that led to what became known as the “4% rule,” a simple framework for estimating how long a retirement portfolio might last. He examined different withdrawal rates across potential starting retirement years (1926–1976), using historical returns for a portfolio of U.S. stocks and bonds.

With a roughly 50% stock and 50% bond portfolio, Bengen found that withdrawing 4% of the initial portfolio value in the first year of retirement—and then adjusting that dollar amount annually for inflation—generally allowed the portfolio to last at least 30 years, even in the most challenging historical market environments. The worst-case scenario occurred for retirees who began in 1976, while lower withdrawal rates such as 3.5% resulted in portfolios lasting well beyond 50 years. When the withdrawal rate increased to 5%, the likelihood of portfolio depletion rose materially, in some cases shortening longevity to roughly 20 years. The conservatism of the 4% rule was intentional and largely designed to address sequence-of-return risk, or the danger of experiencing poor market performance early in retirement while withdrawals are underway.

However, as decades passed and real-world outcomes accumulated, a major criticism of the 4% rule became increasingly clear: it was too conservative for most retirees. Many individuals who followed the rule did not merely avoid running out of money—their portfolios often continued to grow throughout retirement. In inflation-adjusted terms, a significant number of retirees ended their retirement years with more wealth than they had when they started, even after decades of spending. While this represents technical “success,” it exposed a practical flaw in the rule’s application. Most retirees would prefer to enjoy the savings they worked a lifetime to accumulate—maintaining or even improving their lifestyle—rather than underspending for decades and leaving substantial unused wealth behind. In response to this imbalance, Bengen revisited his original work in 2025 using updated market data and a more realistic, diversified portfolio construction. The result was the introduction of what he termed the SAFEMAX withdrawal rate, which increased the historically supported starting withdrawal rate to 4.7% for a 30-year retirement horizon. Under this framework, a retiree with a $1 million portfolio could withdraw $47,000 in the first year (instead of $40,000 under the original rule), with inflation adjustments thereafter, while still maintaining a high probability of portfolio longevity.

A few key planning variables were not fully considered in the original 4% rule—but matter significantly in real life:

Asset Allocation

The study focused on portfolio survival, not on how much money remained in scenarios with high success rates. While multiple allocations beyond 50% equities and 50% fixed income were tested, portfolios with higher equity exposure often produced similar success rates while generating substantial surplus wealth. In some cases, portfolios ended with several times the original starting value. In practice, this raises a critical planning question: if a retirement plan is on track to significantly overfund future needs, does it make sense to continue spending at the same conservative rate?

Inflexibility

The 4% rule assumes a constant, inflation-adjusted spending pattern over the entire retirement period. Life, however, is not linear. One-time expenses—whether discretionary (travel, lifestyle upgrades) or unavoidable (health-related events)—were not accounted for. In scenarios where a plan is projected to far exceed required spending needs, increasing withdrawals over time may be both reasonable and desirable.

Taxes

The original research did not incorporate taxation. In reality, the tax location of assets matters greatly. Withdrawals from tax-deferred retirement accounts, Roth accounts, and taxable brokerage accounts are all treated differently, and after-tax cash flow—not the pre-tax withdrawal rate—ultimately determines whether a retirement strategy succeeds.

It’s important to emphasize that neither the original 4% rule nor the updated 4.7% SAFEMAX rule is a law of nature. Both are guidelines based on historical data. Actual sustainable withdrawal rates vary depending on asset allocation, market valuations at retirement, spending flexibility, tax considerations, and legacy goals. In environments where stock market valuations are elevated, a more conservative rate closer to 4% may still be appropriate, while lower valuation environments may support higher withdrawals. Leaving a meaningful legacy for heirs similarly requires a lower spending rate.

Morningstar, a financial services and investment research firm, updates their study on safe withdrawal rates annually. They concluded that for 2026, along with inflation expectations, future projected returns for the capital markets have gone up slightly since last year. They believed, coming into 2025, that 3.7% is the highest safe withdrawal rate after calculating a higher safe withdrawal rate of 4% in 2024 and, for 2026, the rate is back to 3.9%.

Their study also looked at alternative withdrawal strategies, rather than assuming retirees spend the same amount each year every year, including the concept of Dynamic Withdrawal Strategies. These strategies involve adjusting how much you can withdraw each year based on certain variables. In tough markets, take out less; in strong markets, you might be able to take out more. This flexible approach usually allows for higher withdrawal rates. It helps prevent spending too much when the market is down and gives you a bit of a raise when it’s doing well. Here are some examples of different types of dynamic withdrawal strategies based on timing:

Retirement Spending “Smile”

Some clients may anticipate a retirement where spending tends to gradually decrease. As one ages during retirement, they can see themselves wanting to do less and therefore needing less income until the later-stage years when there might be an increase in spending for long-term care or other medical expenses. This pattern of gradually reducing expenses until increasing them later looks like an actual “smile” when plotted on a chart. This strategy accounts for increased spending later in life but allows for a higher initial withdrawal rate.

Retirement Spending “Stages”

Some clients look at retirement in multiple phases or stages. Spending patterns can start off higher at the onset of retirement, or the Go-Go Years. Retirees may want to make sure they spend their monies on milestone goals like trips, wish list items or at a higher rate when they believe they’ll be healthier and better equipped to do more. Assumed spending can then be reduced at a later phase to account for the Slow-Go Years once they cover those initial goals and then again towards the end of a plan, sometimes referred to as the No-Go Years. This strategy supports the school of thought that life is not linear, and there is a priority to spend more monies earlier in retirement if a decline in health limits the ability to have a more active lifestyle in the later stages of life.

Guardrails

The Guardrails method, created by financial planner Jonathan Guyton and computer scientist William Klinger between 2004-2006, allows retirement spending to fluctuate with market performance for the specified timeframe. Each year, it adjusts withdrawals based on how well your investments are doing and the previous withdrawal percentage. The goal is to give you raises when the market is doing well but also lower withdrawals after market losses, aiming for a balance. This method allows for higher initial withdrawal rates but adheres to strict rules to make it work. Decision rules include when to adjust spending up to account for inflation and how to take distributions from your investments, dividends, and interest first, when markets dictate lowering your withdrawal percentage. Planners are testing alternatives or variations to the Guardrails method due to concerns that large changes in withdrawal rates from year to year based on market performance might be difficult for clients to stick to.

As with most Rules of Thumb, the 4% withdrawal rule is a general principle that is mostly correct in predicting a safe withdrawal rate. But when it comes to your retirement, you may not be comfortable with being mostly correct. The best way to confirm your safe withdrawal rate is with your ACM Wealth Advisor. Planning how to withdraw money in retirement can be tricky, but there are various options to consider. How flexible you want to be with your spending depends on factors like whether you prefer a steady income, want to withdraw as much as possible, plan to leave money for your heirs, and how much of your regular expenses are covered by sources other than your investments, like social security, a pension, or other income sources. As part of your annual review with ACM Wealth advisor, it’s imperative to review your withdrawal strategy and know what changes you can make to stay the course towards a successful retirement.

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