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Annual Best Ideas

Rethinking ‘Safe’ Withdrawal RatesRethinking‘Safe’WithdrawalRates

16 gen 2025

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The most common rule of thumb when it comes to “safe” initial withdrawal rates for retirees is the “4% Rule” which suggests a retiree can safely withdrawal 4% of the initial balance at retirement and increase that initial amount by inflation for 30 years.  We don’t think that’s the best way to think about spending in retirement and that it’s time for a change.

Our new research offers a fresh perspective on portfolio withdrawal rates by integrating spending flexibility (i.e., dynamic withdrawals) and an outcomes metric that better captures the anticipated retiree sentiment regarding various potential outcomes compared to more basic metrics, like success rates. We introduce a series of portfolio withdrawal rates that we believe offer more realistic guidance to retirees, which we call PGIM DC Solutions’ “guided spending rates.”

The following exhibit includes our guided spending rates for varying levels of spending flexibility – conservative, moderate, and enhanced – for three distinct retirement horizons: 40 years, 30 years, and 20 years. A conservative spending rate would be more appropriate for a retiree who is depending on savings (e.g., the DC plan balance) to fund essential spending in retirement (e.g., food, housing, healthcare). An enhanced spending rate would be more appropriate for a retiree who is less dependent on their retirement plan savings and has a reasonable amount of flexibility around the potential to adjust. A moderate spending rate would be a blend of the two.

Guided Spending Rates

Source: Author’s Calculations. PGIM Quantitative Solutions CMAs as of Q4 2023.

Withdrawal Rates

There is over 30 years of research exploring how much a retiree can withdraw annually from a portfolio upon retirement, with estimates generally ranging from 2% to 8% and the industry largely coalescing around 4% (i.e., the “4% Rule”). However, this rule and many modeling tools today use assumptions that do not accurately capture retiree preferences and decisions. There are three common gaps in these models: 

  1. Ignoring other income streams: Many Americans receive some type of guaranteed lifetime pension benefit, such as Social Security, which provides a minimum standard of living. This means a retiree’s portfolio is generating income in addition to these guaranteed sources, thereby providing a safety net that might allow for a different portfolio withdrawal rate. 
  2. Lack of spending flexibility: Traditional models commonly don’t include the desire or ability to adjust spending during retirement, since withdrawals are assumed to change only by the rate of inflation. Retirees have an ability to adjust spending based on real-life needs and circumstances, which can significantly affect spending rates. 
  3. Inadequate evaluation of outcomes: Most financial planning tools today determine safe withdrawal rates by focusing on whether the goal is accomplished in its entirety and ignore the magnitude of failure using a metric commonly referred to as the “probability of success.” A better approach is to consider the total amount of the goal accomplished each year, and, if there is a shortfall, to try to better gauge the potential implications of the shortfall on a retiree. 

How Guided Spending Rates Work

PGIM DC Solutions’ guided spending rates address the above shortcomings, offering recommendations that not only tend to be higher than the traditional 4% rule, but also incorporate a more realistic depiction of retiree decision making. Our model breaks down the retirement goal by perceived flexibility, incorporates adaptive (or dynamic) spending through retirement, and relies on a more realistic outcomes metric. 

We estimate the safe spending level for a variety of scenarios to capture how differences in retiree situations can result in different guidance around spending levels, with a particular focus on spending flexibility. We assume three generic flexibility levels: conservative, moderate, and enhanced, which correspond to essential spending levels of 100%, 70%, and 40%, respectively, of the overall spending target for the specific portfolio. We also consider retirement periods from 10 to 40 years in five-year increments. 

Staying Flexible

Source: Author’s Calculations. PGIM Quantitative Solutions CMAs as of Q4 2023.

Returns are based on PGIM Quantitative Solutions’ Capital Market Assumptions (CMAs), leveraging both the 10-year assumptions (for the first 10 years of the projection) and the steady state assumptions (for years 11 until the end of the scenario). We assume varying equity allocations that correspond to the target level of essential spending, where the fixed income portion is invested in 20% cash and 80% bonds and the equity portion is invested in 70% US large cap equities, 10% US small cap equities, and 20% international equities. 

We assume higher equity allocations for higher levels of spending flexibility, where the equity allocations for the conservative, moderate, and enhanced spending levels are 30%, 50%, and 70%, respectively. Returns for the asset classes are reduced by an assumed 40 basis point investment management fee. (See all of the assumptions here.)

These guided spending rates vary materially by retirement period and by perceived spending flexibility level. Retirees who have more flexibility around spending (i.e., enhanced) have spending rates that are approximately 25% higher than those who are less flexible (i.e., conservative), on average. These estimates are notably higher than other estimates around “safe” withdrawal rates, such as the traditional 4% rule. For example, if we focus on the 30-year period, the guided spending rate would be 5.0% for a retiree with a moderate level of spending flexibility. 

It is important to note that the guided spending rates change over time. We demonstrate this by leveraging PGIM Quantitative Solutions’ historical CMAs created since Q4 2009 (i.e., the forward-looking estimates at that point in time). Historical inflation assumptions are based on the 30-year forecast from the Cleveland Federal Reserve. The results are included in the exhibit below.

Guided Spending Rates for Scenarios: Q4 2009 to Q3 2023, Assuming a 30-Year Retirement Period

Source: Author’s Calculations. PGIM Quantitative Solutions’ CMAs.

There is notable variation in the guided spending rates historically. For example, when interest rates were low in 2021, the corresponding spending rates declined. This suggests retirees should regularly revisit portfolio withdrawal rates as market situations evolve over time. 

Overall, the optimal spending rate is going to vary by retiree and should be determined based on their own unique situation and preferences.

By using our guided spending rates, retirees may find they can safely increase their withdrawal rates, potentially resulting in a more enjoyable retirement for many Americans today.

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Important Information

For Professional Investors Only. Past performance is no guarantee or reliable indicator of future results. All investments involve risk, including the possible loss of capital. These materials are for informational or educational purposes only.

These materials are for financial professional use only and should not be further distributed by the recipient. Receipt of these materials by anyone other than the intended recipient does not establish a relationship between such person and PGIM DC Solutions LLC (“PGIM DC Solutions”) or any of its affiliates. These materials are not intended as an offer or solicitation with respect to the purchase or sale of any security. The information presented is not intended as investment advice and is not a recommendation about managing or investing retirement savings. These materials do not take into account individual investment objectives or financial situations. PGIM DC Solutions LLC (“PGIM DC Solutions”) is an SEC-registered investment adviser, a Delaware limited liability company, and an indirect wholly-owned subsidiary of PGIM, Inc. (“PGIM”), the principal asset management business of Prudential Financial, Inc. (“PFI”) of the United States of America. Registration with the SEC does not imply a certain level of skill or training. PFI of the United States is not affiliated in any manner with Prudential plc incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. Registration with the SEC does not imply a certain level of skill or training. These materials are for informational, illustrative and educational purposes only. This document may contain confidential information and the recipient hereof agrees to maintain the confidentiality of such information. Distribution of this information to any person other than the person to whom it was originally delivered is unauthorized, and any reproduction of these materials, in whole or in part, or the divulgence of any of its contents, is prohibited. The information presented herein was obtained from sources that PGIM DC Solutions believes to be reliable as of the date presented; however, PGIM DC Solutions cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. These materials do not provide any legal, tax or accounting advice. These materials are not intended for distribution in any jurisdiction where such distribution would be unlawful. Certain information contained herein may constitute “forward-looking statements,” (including observations about markets and industry and regulatory trends as of the original date of this document). Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking statements. As a result, you should not rely on such forward-looking statements in making any decisions. No representation or warranty is made as to future performance or such forward-looking statements.

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