Safe withdrawal rates rise above legacy 4% benchmark
New research from PGIM and revisions by the originator of the 4% rule suggest retirees can safely withdraw more, prompting a reassessment of standard savings benchmarks.
The financial planning industry is moving away from the long-standing 4% safe withdrawal rate, with new research suggesting retirees can sustainably draw down higher percentages of their portfolios. This shift could change how wealth managers structure decumulation phases and assess retirement readiness.
Bill Bengen, the financial planner who originally established the 4% rule in 1994, has updated his guidance. He now identifies 4.7% as the worst-case scenario and suggests a 5.5% withdrawal rate for individuals retiring today.
Further challenging the legacy metric, David Blanchett of PGIM published a report titled "Rethinking safe initial withdrawal rates." Blanchett argues the safe rate depends on how much of a portfolio is needed for essential expenses over a 30-year retirement. He found that retirees covering all essentials should use a 4.4% rate, those with moderate flexibility can draw 4.9%, and those with high flexibility can safely withdraw 5.6%.
Certified financial planner Stephanie Marini and retirement expert Robert Brokamp recently discussed these shifts, with Brokamp noting that 5% is a more appropriate starting point for most people than the traditional 4%. This higher baseline allows for more flexible spending without increasing the risk of portfolio depletion.
Savings benchmarks diverge on assumptions
As withdrawal rates adjust, so do the savings targets required to reach them. Major financial-services firms offer different age-based milestones, largely driven by their underlying retirement age assumptions.
Fidelity, which assumes a retirement age of 67, advises workers to have one times their salary saved by age 30, three times by 40, six times by 56, eight times by 60, and ten times by retirement. T. Rowe Price, which benchmarks against a retirement age of 65, suggests a slower early trajectory: 0.5 times salary by 30 and two times by 40. However, T. Rowe Price accelerates the later requirements, targeting five times salary by 50, nine times by 60, and eleven times at retirement.
The divergence highlights a flaw in applying generic rules to individual clients. Variables like high-cost housing markets or the need to support extended family can render standard guidelines inaccurate. For financial professionals, the evolving data reinforces the need to dig into the specific assumptions behind age-based milestones and customize withdrawal strategies rather than relying on broad historical heuristics.
