The latest research suggests that the widely used 4% rule for retirement savings might require some tweaking for 2025 due to prevailing market circumstances. The 4% rule is a retirement strategy that allows retirees to calculate the amount they can withdraw annually from their accounts without depleting their savings over a 30-year retirement span.

As per this strategy, retirees withdraw 4% from their retirement savings in the first year. In subsequent years, they adjust the amount drawn in the previous year upward to account for inflation. However, Morningstar’s research indicates that this “safe” withdrawal rate has dropped to 3.7% in 2025, down from 4% in 2024. This decline is attributed to long-term assumptions in the financial markets.

Analysts from Morningstar note that the anticipated returns from stocks, bonds, and cash over the next 30 years have decreased compared to last year. This means that a portfolio equally divided between stocks and bonds would witness less growth.

Although historical data suggests that the 4% rule is a reasonable starting point, Christine Benz, Morningstar’s Director of Personal Finance and Retirement Planning, suggests that retirees could deviate from this strategy if they’re prepared to adjust their annual spending. This might involve cutting back on expenses during market downturns.

Benz further adds that the assumptions underpinning the 4% rule are quite conservative and warns against inducing fear in people or encouraging them to underspend.

The 4% rule is not without its downsides. For instance, it doesn’t take into account taxes or investment fees. It also assumes that retirees will stick to a very specific investment portfolio, consisting of a 50-50 stock-bond mix, which doesn’t change over time.

Benz suggests that retirees can make some adjustments to the 4% rule. For example, they can plan to spend less later in their retirement years, thereby allowing them to safely spend more in the early years. This approach could potentially raise the safe withdrawal rate in 2025 to 4.8%, which is significantly higher than the aforementioned 3.7% rate.

However, long-term care expenses could rise unexpectedly in the later years of retirement, posing a significant challenge. Additionally, retirees could consider adjusting their withdrawals based on market performance, reducing them during downturns and increasing them when the markets are up.

Finally, delaying Social Security claims until the age of 70 could boost financial security for many retirees by increasing their monthly payments for life. However, this depends on the source of their income during the deferral period. For example, continuing to work would be preferable to relying heavily on their investment portfolio to cover living expenses until age 70.