A Good Starting Withdrawal Rate: Insights for Retirees

A “good” safe starting withdrawal rate isn’t a one-size-fits-all figure; it varies based on several factors. These include stock valuations, bond yields, inflation expectations, and even the retiree’s life expectancy and asset allocation.

According to Morningstar’s 2025 Retirement Income Study, retirees aiming for consistent, inflation-adjusted spending might find a safe starting withdrawal rate of 3.9% to be optimal, with a 90% likelihood of not running out of funds over a hypothetical 30-year retirement. This analysis used forecasts of asset class returns and inflation to find these figures, intentionally excluding Social Security and other income sources not tied to the investment portfolio.

Interestingly, this year’s “base case” safe withdrawal rate has seen a slight uptick from last year’s estimate of 3.7%. For context, the safe withdrawal estimates over the last few years were 3.3% in 2021, 3.8% in 2022, and 4.0% in 2023. However, it’s important to note that these figures are aimed at new retirees and shouldn’t necessarily impact spending for those already retired.

New retirees, in fact, have more flexibility than they might think. Research suggests that those who can manage some variability in their spending might opt for withdrawal rates closer to 6%. How much flexibility one can handle largely depends on personal comfort with changing withdrawals, including how much of their fixed expenses are covered by income streams outside the portfolio.

This study also examined interactions between portfolio withdrawals and income, such as from Social Security or pensions. It appears that strategically increasing income from these areas—like deferring Social Security—works well when paired with adaptable withdrawal strategies. However, a noteworthy trend emerged: as lifetime income increases, the amount available for bequest generally decreases.

Is 3.9% the New 4.0%?

When assessing withdrawal rates for new retirees, we once again included expectations for future asset class returns and inflation. Since one cannot predict exactly which withdrawal initiation rate will be safe over the next three decades, evaluating present conditions can offer insight into whether to adjust the starting percentage or asset allocation to align more closely with spending plans.

To shed light on withdrawal rates in light of current yields and inflation, we consulted Morningstar’s Multi-Asset Research team for their forecasts. They, like many investment researchers, account for anticipated returns, volatility, and inflation across asset classes. From these inputs, a 30-year forecast was developed.

The capital market assumptions outlined in this paper have slightly improved from 2024, mostly positively. This shift is attributed to a methodological update by the MAR team, which now blends top-down inputs (like future earnings growth) with bottom-up evaluations of individual companies. Although expected inflation ticked up a bit—from 2.29% to 2.46%—this new methodology has led to higher expected returns for nearly all asset classes.

For a new retiree with a 30-year time horizon, it’s projected that a safe withdrawal of 3.9% can be achieved with a stock allocation of between 30% and 50%. Intriguingly, increasing stock weight can ramp up volatility, which might actually lower the safe withdrawal rate instead of increasing it. There’s also a clear relationship among time horizon, asset allocation, and withdrawal rates, illustrating that older retirees can afford to withdraw more than the base case rate given their 30-year projection.

The study also tackled the impact of spending shocks, such as market downturns, inflation spikes, and early retirement. Findings indicated retirees who faced poor returns in the first five years without adjusting their spending were more prone to depleting their savings compared to those who started with positive returns. Similarly, those grappling with high inflation early on are likely to exhaust their funds unless they adapt their spending strategies.

Flexibility in Withdrawal Strategies

A 3.9% withdrawal rate, which translates to $39,000 from a $1 million portfolio, can feel rather limiting for newer retirees. As such, the research explored how adopting a flexible withdrawal strategy might enhance initial withdrawal rates. These strategies help retirees avoid overspending during market dips while enabling them to benefit from raises in robust market conditions.

We evaluated several commonly used flexible strategies against fixed withdrawal systems. Each flexible approach tends to support a higher initial safe withdrawal rate compared to traditional methods. For example, a percentage-based approach consistently applies a withdrawal rate against the current portfolio balance, while an endowment technique uses a percentage of the average portfolio value over the last decade to inform withdrawals. Both methods allow for adjustments in annual withdrawal amounts, offering a cushion during declining market values.

The following diagram illustrates how these flexible strategies can strike a balance between increased initial withdrawal rates and the inherent volatility in retiree cash flows. Additionally, we introduced the spending/exit ratio to analyze how each strategy manages lifetime spending compared to bequests.

The Impact of Guaranteed Income

A retiree’s ability to cope with significant fluctuations in withdrawals largely depends on their budget, which encompasses fixed and discretionary expenses, along with income from other sources like Social Security.

To emphasize the significance of guaranteed income, we’ve shifted away from the strict “safe withdrawal rate” notion and instead look at total spending in the first year, combining withdrawals with Social Security benefits. For instance, in a scenario with a 3.9% starting withdrawal, a retiree could expect a portfolio withdrawal of $39,000 and Social Security benefits amounting to $36,000, culminating in total first-year spending of $75,000.

The analysis shows that delaying Social Security can be a savvy choice for retirees aiming to enhance their lifetime income. The best approach appears to be for retirees to defer Social Security while relying on other income sources until their benefits begin. Moreover, dynamic strategies, like guardrail techniques, gain efficiency when paired with a solid and predictable revenue floor.