Safe Withdrawal Rules 4% vs. Guardrails, Sequence-Of-Returns Risk, When To Pause COLA Raises

Planning for retirement is one of the biggest financial challenges anyone faces.

The main question is simple: how much can you safely withdraw each year without running out of money?

But the answer has grown more complex with today’s market realities, changing interest rates, longer life expectancy, and evolving research.

The classic 4% rule—withdraw 4% of your starting portfolio and adjust for inflation—has guided retirees for decades.

But in 2025, experts are offering updated insights, dynamic strategies like guardrails, and cautionary notes about sequence-of-returns risk.

At the same time, retirees must consider when to pause Cost-of-Living Adjustment (COLA) raises to preserve their nest egg.

This article expands on all these approaches with the latest 2025 data, exploring their strengths, weaknesses, and practical applications.

The 4% Rule: Still Relevant—or Outdated?

The 4% rule originated from the Trinity Study, which tested portfolio withdrawals from 1925 to 1995.

It found that retirees who withdrew 4% of their initial portfolio value—then increased that amount each year for inflation—had about a 95% success rate of their money lasting 30 years.

For years, this rule became the “gold standard.” However, with today’s high equity valuations and low bond yields, some analysts believe 4% may now be too aggressive.

Morningstar’s 2025 Guidance

• Morningstar suggests reducing the safe withdrawal rate to 3.7% for 2025.
• Their analysis projects about a 90% chance of sustaining a portfolio for 30 years with this rate.
• This adjustment reflects expectations of lower fixed-income returns and potentially muted equity gains compared to past decades.

Bengen’s Updated View

Bill Bengen, the financial planner who introduced the 4% rule, now says it may be too conservative in many cases:

• He recommends 4.7% as a new baseline.
• For early retirees, he suggests up to 5.25%, assuming a 55% stock / 40% bond / 5% cash allocation.
• His updated numbers reflect more recent back-testing and the inclusion of small-cap equities.

The Bottom Line on 4% in 2025

• Safe range today: 3.7%–4.7%, depending on portfolio mix and market assumptions.
• Conservative retirees may lean toward 3.7%.
• More aggressive retirees with higher stock allocations may aim closer to 4.7%–5%.

Guardrails: Dynamic Withdrawal for Flexibility

Instead of rigidly sticking to one percentage, guardrail strategies allow withdrawals to adapt to market conditions.

How Guardrails Work

• Retirees set an initial withdrawal rate, then adjust up or down depending on portfolio performance.
• If the portfolio grows strongly, withdrawals may increase.
• If it falls sharply, withdrawals are cut back until the market stabilizes.

2025 Research Findings

Morningstar’s latest modeling finds that guardrail methods can support a starting rate as high as 5.2%, compared to 4% under static rules.

This gives retirees about 30% more income early in retirement.

Pros:

• Flexibility to spend more in good years.
• Preserves longevity in bad years.

Cons:

• Income volatility—retirees may face cuts during downturns.
• Lower average ending portfolio compared to static approaches.

Guardrails require discipline: retirees must be willing to reduce withdrawals when triggered. But for those who can handle some income variation, they can maximize lifetime spending.

Sequence-of-Returns Risk: Why Early Losses Matter Most

One of the biggest threats to retirement income is sequence-of-returns risk (SORR).

This means that if your portfolio experiences big losses early in retirement, those withdrawals lock in the losses, making it much harder to recover—even if the long-term average return looks fine.

Example Simulation (Schwab, 2025)

• A retiree taking 4% annually who faces two consecutive 15% market drops would need 28 years of 6% gains to recover fully.
• A retiree taking just 2% annually in the same scenario could recover in 11.5 years.

This shows why conservative early withdrawals can protect against long-term ruin.

By reducing withdrawals in the first years after a downturn, retirees can give their portfolios time to heal.

Mitigating Sequence Risk

• Use guardrails or variable spending rules.
• Keep 1–3 years of cash reserves to avoid selling investments during downturns.
• Start with a lower withdrawal rate in the first decade, then increase later if markets perform well.

When to Pause COLA Raises

Most withdrawal strategies include annual inflation adjustments (COLA) to preserve purchasing power. However, maintaining COLA increases during a bear market can accelerate portfolio depletion.

COLA Pauses in Practice

• Guardrail strategies often skip COLA raises in years of negative returns.
• Morningstar’s 2025 report suggests pausing COLA or even temporarily reducing withdrawals in downturns.
• By pausing COLA, retirees may extend portfolio life by several years.

Example Application

• In a bull market: Apply inflation raises or even modest increases above inflation.
• In a bear market: Freeze withdrawals at last year’s level—or reduce by 5–10% until recovery.

This flexible COLA approach allows starting rates up to 5.1%, while still managing long-term sustainability.

Strategy Comparison

Strategy / Concept	Starting Withdrawal Rate	Pros	Cons / Cautions
4% Rule (Classic)	~4%	Simple, historically robust; inflation adjustments keep pace	May be too high in today’s market; rigid in downturns
Morningstar 3.7% (2025)	~3.7%	Reflects 2025 valuations; safer 30-year plan	Less spending power early; conservative
Bengen 4.7–5.25%	Up to 5.25%	More income for well-balanced portfolios	Higher risk if markets underperform
Guardrails / Dynamic	Up to ~5.2%	30% more income potential; adaptive	Income volatility; requires discipline
Lower Withdrawals (2–3%)	~2–3%	Protects against sequence risk; faster recovery from losses	May under-spend early in retirement
Pause COLA in Downturns	N/A	Preserves capital; increases flexibility	Lifestyle impact; requires restraint

Putting It All Together: Practical Takeaways for 2025

• Don’t rely on a single number. While the 4% rule offers a benchmark, market realities in 2025 suggest safe ranges between 3.7% and 5.2%, depending on flexibility.
• Guardrails can boost income. For retirees comfortable with variable spending, guardrails may allow higher withdrawals while still protecting portfolio longevity.
• Manage sequence risk carefully. Early losses can devastate a plan. Keep reserves, start conservatively, and adjust dynamically.
• COLA pauses are powerful. Skipping inflation adjustments during downturns preserves assets and may increase safe withdrawal rates.
• Personalization matters. The right withdrawal strategy depends on your risk tolerance, asset allocation, and lifestyle goals.

Retirement planning in 2025 requires balancing income with longevity in a more uncertain market environment. The classic 4% rule still offers a guideline, but modern realities suggest lowering to 3.7% for conservative retirees or adopting dynamic guardrails to push rates above 5%.

The most critical risks remain sequence-of-returns losses early in retirement and rigid COLA increases during downturns.

By adopting flexible approaches—like pausing COLA, using guardrails, and adjusting withdrawals based on market health—retirees can both maximize income and protect their long-term security.

In the end, the best strategy is not one number, but a living plan that adapts with markets and personal needs.

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