What the New 4.7% Rule Looks Like for Spending

As there’s no way to predict investment returns, inflation rates or longevity, the fear of running out of money in retirement is a real concern for most seniors. To help alleviate this fear, financial advisors often recommend that seniors withdraw no more than 4% of their retirement funds annually, adjusted for inflation. The idea is that at that rate of withdrawal, there’s a very high probability that your money will last for at least 30 years in retirement.

But for 2026 and beyond, experts have begun suggesting that a withdrawal rate of 4.7% might be more appropriate. Here’s the story behind the new recommendation and what it might mean for your retirement spending.

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If you have a $250,000 portfolio, a 4.7% withdrawal rate means you could safely take out $11,750 in year one of retirement. This number is adjusted for inflation annually to maintain your standard of living. So if inflation runs 3% in year one, it means you could safely withdraw $12,102.50 in year two.

There are a few reasons why the “safe” withdrawal rate in retirement has jumped from 4% to 4.7%.

The first is that investors have a wider variety of higher-paying options than they did in prior decades. While interest rates fluctuate over time, for the most part, they are higher now than they were in the 2010s. And while retirement savers in past decades often had to rely on Treasury bills and brick-and-mortar bank savings accounts, they now have access to higher-paying options like high-yield savings accounts. These accounts are still FDIC insured but typically pay 10 times or more what savers earn with traditional bank accounts.

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Another reason is that many seniors are willing to pick up side gigs or part-time jobs to supplement their income in “retirement.” Even a relatively modest boost in income can take immense pressure off a retirement portfolio to provide enough retirement income.

A third reason is that financial planning has become more advanced. Advisors and their clients now understand that they may have to adjust retirement spending patterns in line with real-world investment results. Cutting spending when markets and/or income fall, for example, is a way to extend the longevity of a retirement portfolio.

The best retirement plans come with “guard rails” to help ensure that even bad investment results don’t derail your entire retirement plan. The 4.7% rule in and of itself is designed to protect retirees from outliving their money. But if you build some flexibility into your plan, you can help avoid the scenario where you run out of money too early.

Here are some steps to take.

The last thing you want to do is take money out of your retirement account for unscheduled expenses. Doing so will disrupt your projections and could leave you with a major shortfall by the end of retirement. This is why having a substantial emergency fund is absolutely essential if you’re on the 4.7% withdrawal plan. Three to six months’ worth of expenses is a good start, but if you’re planning on a 20- or 30-year retirement, shooting for a year or two may not be excessive.

One of the biggest risks of the 4.7% withdrawal plan is that you suffer through a major market selloff in the early years of your retirement. If you retire with a $1 million portfolio and your portfolio drops 10% in the first year, you’ll only be left with $900,000 as you’re beginning your withdrawals. This could dramatically shorten the sustainability of your nest egg.

One strategy to minimize the damage of bad investment performance is to adjust your withdrawals based on how your account performs. In years when your income or appreciation are down, you can take your withdrawals down as well. This, of course, means that you’ll have to adjust your spending downward as well. But having this flexibility is one of the guard rails that can keep your retirement plan on track. Typically, markets recover relatively quickly, so you should be able to restore your original withdrawal levels the following year in most cases.

One way to build some extra room into your retirement budget is to take less than you’re “owed” every year in terms of your inflation adjustment. Imagine, for example, that you take a $25,000 distribution one year and inflation is at 3%. Rather than boosting that withdrawal by $750 the next year, to $25,750, consider taking just $25,500 instead. Over time, if you can get used to living less than your safe withdrawal rate, you’ll automatically build a buffer in case times get rough or your projections don’t work out exactly.

Experts may say that a 4.7% withdrawal rate is a “safe” one for retirement longevity, but it’s best to use it simply as a starting point. If you can tailor your distribution strategy to your own personal financial situation, you’re much more likely to both protect your nest egg and enjoy your retirement lifestyle.

What the New 4.7% Rule Looks Like for Spending

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