Neither rate is universally safe. The classic 4% rule is a historical starting point for a 30-year retirement: withdraw 4% of the portfolio’s value at retirement in year one, then increase that initial dollar amount with inflation. A fixed, inflation-adjusted 5% start produces more income but leaves less margin for bad markets, high inflation and a long retirement.
A 5% start can be reasonable only when the plan has a shorter horizon, substantial guaranteed income, or spending that can fall when markets do. The right choice depends on the withdrawal method, time horizon, asset mix, taxes, fees, sequence of returns and how much spending you can adjust—not on the percentage alone.
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What the 4% and 5% rules actually mean
The percentage is normally applied to your portfolio on the day retirement begins, not recalculated from the account’s changing balance every year. With a $1,000,000 portfolio, a 4% first-year withdrawal is $40,000. In year two, the plan raises that $40,000 by the measured inflation adjustment, whether the portfolio rose or fell. A 5% start would be $50,000, followed by inflation increases.
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Do not confuse it with taking a percentage of today’s balance
If you instead withdraw 4% or 5% of the portfolio’s current value each year, the dollar amount automatically falls after a loss and rises after a gain. That approach reduces the chance of exhausting the account, but income is less predictable. A 4% current-balance withdrawal is not the same promise as the classic 4% rule, and the two methods should never be compared as though they were interchangeable.
What the classic rule was designed to answer
William Bengen’s 1994 work used historical market data to examine whether a retiree could maintain an inflation-adjusted withdrawal over a 30-year period. It identified a historically resilient starting rate under the tested market history and asset mixes. It did not prove that every future retiree can spend that amount, nor did it model every tax system, fee level, asset allocation or spending pattern.
Why a historical backtest is different from a forecast
A historical backtest asks, “Would this rule have survived the market sequences in the selected record?” A forward-looking projection asks, “How often does the rule succeed under assumptions about future returns, inflation and correlations?” Those are different questions, so their percentages can differ without either calculation being a mathematical error.
Morningstar’s 2024 report illustrates the distinction. Its forward-looking base model produced a highest starting rate of 3.7% for a 30-year horizon and a 90% success target. In a separate simulation using historical asset-class returns, it reported 5.5% for a 50% stock/50% bond portfolio and 5.7% for a 60% stock/40% bond portfolio, also over 30 years and with a 90% success target. The report also gave 4.8% for spending patterns designed to match empirical retiree spending. That figure was not the fixed-real base case.
Those 2024 figures should not be treated as today’s forecast. Current forward estimates can change with valuations, bond yields, inflation expectations and the report’s assumptions. Historical results can also look stronger or weaker depending on the start date, asset classes and rebalancing rules selected.
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What the latest Morningstar figures show about time horizon
Morningstar’s 2025 analysis used a 90% modeled probability-of-success framing and reported a maximum 30-year base-case starting rate of 3.9% for a portfolio with 40% equities and 60% fixed income. For a 40-year horizon, its highest base-case starting rate was 3.3%. For a 20-year anticipated horizon, the report said a balanced portfolio could support more than 5% when the initial dollar amount is inflation-adjusted thereafter.
| Report and scenario | Starting rate reported | What the figure means |
|---|---|---|
| Morningstar 2024, forward-looking base model, 30 years | 3.7% | Highest starting rate in that model, targeting 90% success |
| Morningstar 2024, historical-return simulation, 50% stocks/50% bonds, 30 years | 5.5% | Historical simulation rate with a 90% success target |
| Morningstar 2024, historical-return simulation, 60% stocks/40% bonds, 30 years | 5.7% | Historical simulation rate with a 90% success target |
| Morningstar 2024, empirical retiree-spending pattern | 4.8% | Rate for a spending pattern designed to resemble observed retiree spending; not the fixed-real base case |
| Morningstar 2025, 40% equities/60% fixed income, 30 years | 3.9% | Maximum base-case starting rate with a 90% success target |
| Morningstar 2025, base case, 40 years | 3.3% | Highest base-case starting rate for the longer horizon |
| Morningstar 2025, balanced portfolio, 20 years | More than 5% | Report’s statement for an inflation-adjusted initial dollar amount under its 90% success framing |
A 90% success target is not a guarantee. It leaves a modeled failure possibility and depends on the report’s return, inflation, volatility, correlation, rebalancing and spending assumptions. The Morningstar studies are oriented toward U.S. markets; the assumptions may not transfer to another country, tax regime or portfolio.
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A 20-year retirement
A retiree who expects to spend for about 20 years has fewer withdrawal years in which a bad sequence can compound. Morningstar’s 2025 report says a balanced portfolio can support more than 5% in that setting under its stated method and 90% success framing. That is evidence of a horizon effect, not permission to use 5% without checking spending needs, taxes, fees and the possibility of living longer than expected.
A 30-year retirement
Thirty years is the conventional comparison point for the 4% rule. It may fit someone retiring around a traditional retirement age, but longevity is uncertain. A plan that begins at 65 and must fund spending to age 95 has a different risk profile from one that begins at 55 and needs to last to 95. The 2024 and 2025 Morningstar base-case figures show why a 4% starting rate is not a single current forecast: the result changed with the report year, asset mix and assumptions.
A 40-year or early-retirement horizon
Early retirees face more years of withdrawals and a greater chance that a poor first decade will affect the remainder of the plan. Morningstar’s 2025 highest base-case rate for 40 years was 3.3%. A fixed 5% inflation-adjusted start therefore requires unusually strong resources, significant spending flexibility, or another reliable income source. Treating a 30-year rule as automatically valid for a 40-year horizon is a common planning error.
Sequence risk is the reason the first years matter most
Average long-term returns do not describe the experience of a retiree who is selling assets while the market is falling. If losses occur early, withdrawals remove shares that would otherwise have participated in a later recovery. The portfolio then has a smaller base from which to compound. High inflation can create a similar problem by forcing larger dollar withdrawals just as real returns are weak.
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Ways to reduce early-sequence pressure
- Keep a planned reserve for near-term spending so a temporary equity decline does not force the sale of depressed assets.
- Separate essential expenses from discretionary expenses that can be paused or reduced.
- Review the withdrawal after a major market decline instead of increasing it automatically by inflation.
- Coordinate portfolio withdrawals with pensions, Social Security or other guaranteed income so investments do not have to fund every essential bill.
When a 5% starting rate may fit
A 5% start is more plausible when several favorable conditions line up:
- The anticipated withdrawal period is closer to 20 years than 40 years.
- You can reduce travel, gifts, renovations and other discretionary spending after a poor market sequence.
- Guaranteed income covers a large share of essential costs.
- The portfolio’s allocation and fees are appropriate for the withdrawal method, and you understand the risk of both equity losses and inflation.
- You are willing to accept a lower ending balance or a smaller bequest if the plan’s spending goal is met.
None of these conditions makes 5% universally safe. They change the consequences of a shortfall and can make a flexible plan workable where a rigid plan would not be.
Fixed-real spending versus flexible spending
Fixed, inflation-adjusted withdrawals
This method offers the clearest income target. You set the first-year amount, then adjust the dollar amount for inflation. Its weakness is that spending does not respond to the portfolio’s ability to support it. A 5% initial amount can become particularly demanding after an early loss.
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Percentage-of-balance withdrawals
Here, each year’s withdrawal is a stated percentage of the current balance. Income falls after a loss and rises after a gain. The method greatly reduces the mathematical risk of running out of money, but the retiree must tolerate variable income and may need to cut spending when markets are weak.
Guardrails and other flexible rules
A guardrail approach begins with a target rate but changes withdrawals when the portfolio’s value moves beyond preset boundaries. Other systems skip an inflation increase after a loss or limit annual increases and decreases. Flexible systems can support a higher initial income than a rigid fixed-real plan, but the price is less predictable income. The relevant question is not simply “Can I start at 5%?” but “What cuts would I accept, and when would they occur?”
Asset allocation changes the comparison
The same withdrawal rate can behave differently in a portfolio dominated by stocks, bonds or cash. More equities may provide higher expected growth but also larger losses and more sequence risk. More fixed income can reduce volatility but may lower long-term growth and expose the plan to inflation. Morningstar’s published figures demonstrate that the portfolio mix is part of the number: its 2025 3.9% maximum base-case rate was tied to a 40% equity/60% fixed-income portfolio, while its 2024 historical simulations reported different rates for 50/50 and 60/40 portfolios.
Do not solve a withdrawal problem by changing the rate alone. Set an allocation that matches the horizon, risk capacity and spending method, then test the rate against that allocation. Rebalancing rules, fund expenses and taxes also affect the amount available to spend.
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Taxes, fees and guaranteed income belong in the calculation
The rule’s percentage is normally quoted as a portfolio withdrawal before considering the retiree’s tax bill. A $40,000 gross withdrawal may not provide $40,000 for spending after income tax, withholding or account-specific rules. Investment fees reduce the balance available to compound, and trading costs or fund expenses can make a small margin matter over decades.
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Guaranteed income changes how much the portfolio must supply. If pensions or other lifetime income cover rent, food and health-care premiums, the portfolio can fund discretionary goals and may be able to use a more flexible method. If the portfolio must cover every expense, a lower starting rate or a larger reserve may be appropriate. Include inflation protection, survivor benefits and the timing of each income source rather than counting only the headline payment.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.A practical way to choose between 4% and 5%
- Define the horizon. Use a realistic life expectancy range, not only an optimistic date. Include the possibility that one spouse lives substantially longer than the other.
- Write the first-year spending need. Separate essential, discretionary and one-time expenses. Calculate the gross withdrawal required after accounting for guaranteed income.
- Choose the withdrawal method. State whether the first-year amount will be inflation-adjusted, tied to the current balance, or governed by explicit guardrails.
- Document the portfolio allocation. Record stock, bond and cash percentages, rebalancing rules and total ongoing costs.
- Stress-test the first five years. Consider an early market loss, an inflation spike and a combination of both. Decide in advance which discretionary expenses would be reduced.
- Set a review schedule. Revisit spending, taxes, allocation and remaining horizon at least annually and after major changes in health, income or markets.
- Define the success standard. Decide whether success means never exhausting the portfolio, maintaining essential spending, preserving a bequest, or accepting a limited chance of depletion. A modeled 90% success target is not the same as certainty.
Worked illustration of the methods
Assume a $1,000,000 portfolio and no other income. Under a fixed-real 4% method, the first withdrawal is $40,000. If inflation is 3% for the next year, the planned withdrawal becomes $41,200, regardless of the account balance. Under a fixed-real 5% method, the first withdrawal is $50,000 and the inflation-adjusted second-year target is $51,500.
Under a current-balance method, a 4% withdrawal after a year-end balance of $900,000 would be $36,000. That protects the portfolio from a rising withdrawal rate but requires the household to spend $4,000 less than in the original example. The arithmetic shows why the labels alone are insufficient: all three plans use a percentage, but they deliver different income behavior and different risks.
Common mistakes to avoid
- Calling 4% a promise. It is a rule of thumb based on historical analysis and assumptions, not an insurance contract.
- Calling 5% automatically reckless. A shorter horizon and flexible spending can change the trade-off, although they do not eliminate risk.
- Applying a 30-year rate to early retirement. A 40-year plan has a different required margin; Morningstar’s 2025 base-case maximum was 3.3% for that horizon.
- Mixing methods in one calculation. Do not compare a fixed-real 4% rule with a 5% current-balance rule without stating that income stability differs.
- Ignoring sequence risk. A plan based only on average returns can miss the damage caused by losses in the first five years.
- Leaving taxes and fees out. Gross withdrawals, net spending and portfolio returns are not the same figures.
- Assuming a study’s geography is universal. Morningstar’s reports are U.S.-market oriented, and their assumptions may not fit another country or tax system.
- Focusing only on the ending balance. A plan can leave money at year 30 yet fail to fund essential spending in a bad early sequence, or it can preserve spending while leaving a smaller bequest.
How to interpret the evidence responsibly
Morningstar portfolio strategist Amy Arnott described the purpose of the analysis in an Associated Press interview on July 16, 2025: “The goal was to estimate how much you can safely withdraw from your portfolio during retirement.” The word “estimate” matters. The result is conditional on the study’s assumptions and success definition.
Use the published percentages as reference points for building questions, not as a personalized recommendation. A plan should show the effect of changing the horizon, asset allocation, spending flexibility, guaranteed income, taxes, fees and bequest objective. Retirement-income software or fiduciary advice can be useful when those variables are difficult to model, but any recommendation should disclose its assumptions, costs and geographic scope.
Decision guide
| Your circumstances | More defensible starting approach | Main trade-off |
|---|---|---|
| About 20 years, strong guaranteed income, flexible discretionary spending | Consider testing a rate above 4%, including 5%, under a stated flexible rule | Higher starting income can require cuts or a smaller bequest |
| About 30 years, essential spending depends on the portfolio | Test a fixed-real rate around the historical 4% reference and lower rates under current assumptions | More margin means less initial spending |
| About 40 years or early retirement | Start with a lower rate and model flexible spending; Morningstar’s 2025 base-case high was 3.3% | Lower income now, but more protection against longevity and sequence risk |
| Income must never fall | Prioritize guaranteed income and a conservative portfolio withdrawal | May require working longer, saving more or spending less |
| Income can move with markets | Use a current-balance or guardrail method and define cuts before retirement | Less predictable annual spending |
The best rate is the one that remains workable when markets are unfavorable, not the one that produces the largest first-year check in an average scenario. Compare 4% and 5% only after specifying the horizon, withdrawal mechanics, allocation, success standard and spending flexibility.
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