Should You Tweak Your Withdrawal Rate for 2025?

Key Takeaways

• If you are actively spending from your portfolio and that portfolio has losses, that leaves less in place in the portfolio to recover and rebound when the market eventually does. Your plan will be more sustainable if you can spend a little less during those periods of market downdrafts.
• If big losses occur within five years of someone’s retirement date, it’ll decrease the sustainability of the plan, whereas if someone is about 15 years into retirement, big losses matter less.
• Retirees should ideally do an annual portfolio review that includes revisiting their portfolio spending rate.
• Asset allocation is a key tool in your tool kit with respect to ensuring that your portfolio spending rate is sustainable.

Margaret Giles: Hi, I’m Margaret Giles from Morningstar. The year 2025 has gotten off to a rocky start, and that could be unsettling for some retirees. Joining me to discuss whether the recent volatility should affect how much retirees can spend from their portfolios is Christine Benz. Christine is Morningstar’s director of personal finance and retirement planning, host of The Long View podcast, and author of the bestselling book, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement. Thanks for being here, Christine.

Christine Benz: Hi, Margaret. Great to see you.

How Market Volatility Affects Portfolio Spending

Giles: OK, let’s get into it. So first, what’s the connection between market volatility and portfolio spending? Why should one affect the other?

Benz: Well, the idea is pretty intuitive. So if you are actively spending from your portfolio and that portfolio has losses, that leaves less in place in the portfolio to recover and rebound when the market eventually does. So the basic idea is that if you can spend a little less during those periods of market downdrafts, that helps improve the sustainability of your plan. It just gives your portfolio a better shot at lasting over, say, the 25- or 30-year retirement horizon that many retirees plan for.

Sequence Risk in Retirement

Giles: So what role does someone’s retirement stage play in this? We often hear that big losses earlier in retirement can be especially negative, but that’s less so maybe later on in retirement.

Benz: Yeah, that’s exactly right. Jeff Ptak recently did a piece about this topic. It’s called Sequence Risk, that when those bad market returns occur in your retirement, really matters in terms of the sustainability of your plan. So Jeff found that if big losses occurred within five years of someone’s retirement date—so if they just happen right out of the box after someone’s retired—that does really decrease the sustainability of the plan. But if someone is say 15 years into retirement—if I’ve retired when I’m 65 and I’m 80 now—well even big losses, even a repeat of the great financial crisis, it matters less because I’ve essentially made it out of the woods in my first 15 years of retirement. So people who have been retired for several years or a decade or more can take some comfort in that.

Should Retirees Lower Their Starting Withdrawal During Market Volatility?

Giles: OK, so you and the team produced some research in late 2024 that pointed to a 3.7% starting withdrawal rate that can be sustainable over a 30-year horizon. Does recent market volatility suggest that people should spend even less than that?

Benz: Probably not. It’s important to note that the research that we do, that starting withdrawal rate that we come up with, it’s kind of built for a worst-case scenario. It assumes that you’re going to set your starting withdrawal percentage and basically never revisit it again. So it’s meant to be very, very conservative. It means that someone’s using a fixed, real withdrawal system, they’re never revisiting their planned spending. So it’s very much built for a worst-case scenario-type environment. The big negative of that spending system is really the opposite—that you would probably in many market environments underspend relative to what you could do. So if you’re using that kind of system, and I would also say that most retirees don’t actually spend that way where they just set a starting percentage and never revisit it. But if someone is using that type of system, the starting withdrawal rate that they are using is kind of built for a really bad market environment, or it assumes that there will be some bad periods along the way.

Starting Withdrawal Rate During Market Volatility for Flexible Spending Strategies

Giles: OK, so how about those people that use a more flexible system for their portfolio withdrawals? Should they be spending less?

Benz: Well, it probably wouldn’t hurt to do a little belt tightening, but most of those systems just require that you revisit your spending rate once a year. I don’t think that we want anyone to be constantly worrying about, well, should I not go out to dinner tonight or whatever the case might be? You should ideally just do a good once-annual portfolio review that would include revisiting your portfolio spending rate. Most of the flexible systems that we explored in our retirement income research do revolve around a once-annual review rather than course corrections throughout a given year. So if you’re using a flexible system, just plan to do it whenever you do it, year-end or whatever time of year. You shouldn’t necessarily be doing it throughout a given calendar year.

Tools for Retirees in a Volatile Market

Giles: That certainly feels more manageable. So you think it’s important to note that adjusting spending is not the only tool that retirees have when it comes to addressing market volatility. So what else can they do?

Benz: Well, asset allocation is your other key tool in your tool kit with respect to ensuring that your portfolio spending rate is sustainable. So you would want to hold a component of safer assets alongside the equity assets. So in a period like right now, if potentially you could spend from cash rather than having to touch your equity assets, certainly that seems like a best practice. In other market environments, you may in fact want to spend from appreciated equities to help take some risk out of your portfolio. But right now, it seems like if we’re in a period of volatility, if you can spend from the safer assets, that’s probably a good way to go about it.

Giles: All right. Well, thanks for taking the time, Christine. I really appreciate it.

Benz: Good to see you, Margaret. Thank you so much.

Giles: I’m Margaret Giles with Morningstar. Thanks for watching.

Watch Ed Slott: How Roth IRAs Can Help With Estate Planning for more from Christine Benz.