Rethinking Retirement Withdrawal Strategies in 2025
Planning for retirement is no longer just about building wealth, it’s about protecting it and using it wisely. With retirement lasting longer than ever due to increased life expectancy, your approach to retirement withdrawals needs to be both strategic and flexible. One increasingly discussed idea is the 7 percent rule for retirement, a bold strategy that suggests retirees can withdraw 7 percent of their retirement savings annually.
But is this higher withdrawal rate realistic, or does it risk depleting savings too early? At Towerpoint Wealth, our fiduciary approach to retirement planning emphasizes financial security, sustainable income, and strategies based on historical market data. In this blog post, we explore the 7 percent rule, compare it to more traditional retirement withdrawal strategies, and share what truly matters when building a retirement strategy tailored to your goals.
What Is the 7% Rule for Retirement?
The 7 percent rule for retirement is a simple withdrawal strategy that suggests retirees can withdraw 7 percent of their total retirement savings in the first year of retirement, then adjust that annual withdrawal amount each year to keep pace with inflation. For instance, with $1 million in retirement accounts, this strategy allows you to withdraw $70,000 in year one, increasing that amount slightly each year as the cost of living rises.
Unlike the more conservative 4 percent rule, which is grounded in decades of research and testing through historical market data, the 7 percent rule is considered more aggressive. It appeals to those who want to enjoy a higher standard of living in their early retirement years or those who have a higher risk tolerance. However, this higher withdrawal rate requires careful planning and may not suit most retirees.
Why the 7% Rule Appeals to Some Retirees
Higher Income in the Early Years
The biggest appeal of the 7 percent rule is the potential for a larger retirement income in the early years. Many retirees envision their golden years as a time to travel, enjoy hobbies, and spend more freely. Withdrawing more early in retirement can help support this desired lifestyle, especially before healthcare costs or mobility issues increase later in life.
Simplicity and Predictability
The 7 percent rule offers clarity. It sets a fixed percentage, so retirees know exactly how much they can spend. For some individuals managing personal finances without a financial advisor, this rule may seem like a helpful guideline for maintaining cash flow.
Optimism About Market Performance
Some investors believe that with a well-constructed, diversified portfolio containing growth assets like mutual funds and stock funds, achieving an average 7 percent return over time is a reasonable expectation. In theory, this would allow them to sustain a 7 percent withdrawal rate without depleting their nest egg.
But market conditions can change rapidly, and depending too heavily on optimistic assumptions about market returns can pose serious risks.
The Risks Behind a 7 Percent Withdrawal Rate
Sequence of Returns Risk
One of the most critical issues with the 7 percent rule is sequence of returns risk. If your investment portfolio experiences poor market performance or market downturns early in retirement, withdrawing a high percentage can quickly erode your savings. Even if the market rebounds later, the damage to your retirement accounts may be irreversible.
Longer Life Expectancy and Depleting Savings
With many retirees now living well into their 80s and 90s, your retirement savings need to last 25 to 30 years or more. A higher withdrawal rate in the early years significantly increases the risk of depleting savings before the end of your retirement. For most retirees, preserving long-term financial security is more important than maximizing short-term income.
Lack of Empirical Support Compared to the 4 Percent Rule
The 4 percent rule was derived from the Trinity Study and other research analyzing various asset allocations and withdrawal rates across decades of historical market data. The 7 percent rule has no such backing. While it may work in certain market conditions, it has not been proven to be a sustainable withdrawal strategy over a full retirement horizon.
Limited Flexibility in a Changing Environment
The 7 percent rule assumes a fixed withdrawal rate, which can be dangerous. Retirement is rarely predictable. You may face unexpected expenses like rising healthcare costs, family emergencies, or extended market volatility. A flexible withdrawal strategy that adapts to your portfolio value and current market conditions is often a better fit for long-term retirement planning.
7 Percent Rule vs. 4 Percent Rule: A Comparison
| Category | 4 Percent Rule | 7 Percent Rule |
|---|---|---|
| Empirical Support | Strong | Weak |
| Withdrawal Rate | 4 percent | 7 percent |
| Life Expectancy Coverage | 30+ years | Often < 20 years |
| Market Risk | Lower | Higher |
| Flexibility | Moderate | Low |
| Suitability | Most retirees | Higher risk tolerance only |
While the 7 percent rule may offer more income in the short term, the 4 percent rule remains a better foundation for a comfortable retirement that spans decades. It balances financial freedom with prudent risk management, especially for retirees relying heavily on income from their retirement portfolio.
When Might the 7 Percent Rule Work?
The 7 percent rule may be appropriate for a small number of retirees under specific individual circumstances.
Shorter Retirement Horizon
If you begin retirement later in life or have a reduced life expectancy due to health conditions, a shorter retirement horizon may allow for a higher withdrawal rate.
Other Income Sources
Retirees with reliable, guaranteed income such as pensions, annuities, or Social Security may have the flexibility to take more from their retirement accounts without risking financial security.
High Equity Allocation and Risk Tolerance
If your retirement portfolio is heavily weighted in growth assets and you have a higher risk tolerance, you may be willing to accept the potential for portfolio decline in exchange for higher early income.
Flexible Spending
If you are willing and able to reduce retirement spending during market downturns or years of poor investment performance, you can mitigate some of the risks associated with a 7 percent withdrawal rate.
Still, even in these scenarios, consulting a financial advisor is critical. An experienced professional can help you understand the long-term implications of your withdrawal strategy and tailor it to your broader financial goals.
Smarter, More Sustainable Alternatives
Dynamic Withdrawal Strategies
Rather than sticking to a fixed withdrawal rate, dynamic strategies adjust based on your portfolio value, market conditions, and spending needs. Examples include the Guyton-Klinger rules and guardrails-based approaches, which balance flexibility with discipline.
Bucket Strategy
Segmenting your retirement savings into short-term, mid-term, and long-term “buckets” based on when the funds will be used helps manage market volatility and ensures a steady stream of income for essential expenses.
Partial Annuitization for Guaranteed Income
Using a portion of your retirement accounts to purchase an annuity can provide guaranteed income for life, reducing pressure on your investment portfolio and adding financial stability.
Comprehensive Financial Planning
True retirement success comes from understanding your unique tax situation, healthcare needs, desired lifestyle, and legacy goals. A personalized retirement strategy built with the help of a fiduciary financial advisor ensures all these factors are accounted for.
FAQs About the 7 Percent Rule for Retirement
What is the 7 percent rule for retirement, and is it sustainable?
The 7 percent rule for retirement suggests retirees withdraw 7 percent of their portfolio in the first year and adjust annually for inflation. While it provides higher income early on, it is not considered a sustainable income strategy for most retirees due to higher risk and longer life expectancy.
Is the 7 percent rule better than the 4 percent rule?
Not necessarily. The 4 percent rule is supported by decades of historical data and is more reliable for sustaining income over a 30-year retirement. The 7 percent rule poses greater risk, especially during periods of poor market performance.
Can I use the 7 percent rule if I have Social Security or other income sources?
Possibly. If you have strong guaranteed income from Social Security, pensions, or annuities, and a smaller portion of your income relies on retirement withdrawals, the 7 percent rule may be more viable, but only with professional advice and ongoing review.
How does the 7 percent rule handle market volatility?
It doesn’t. That’s one of its weaknesses. In times of market downturns or volatility, withdrawing a high percentage can rapidly shrink your portfolio. A flexible withdrawal strategy is better suited for responding to market fluctuations.
What’s the best withdrawal strategy for retirement?
There is no one-size-fits-all answer. The best withdrawal strategy depends on your retirement savings, life expectancy, asset allocation, tax-deferred accounts, other income sources, and overall financial goals. Working with a financial adviser helps ensure your plan is tailored to your needs.
Conclusion: The 7 Percent Rule Requires Careful Planning
While the 7 percent rule for retirement may seem attractive, especially for those who want to enjoy a higher lifestyle in the early retirement years, it is not a suitable strategy for most retirees. It assumes ideal market conditions, consistent portfolio growth, and a shorter retirement timeframe. Unfortunately, reality often tells a different story.
At Towerpoint Wealth, we help our clients navigate the complexity of retirement planning by creating strategies that reflect their financial goals, risk tolerance, and total retirement savings. Whether you’re just starting to think about retirement or you’re looking to refine your withdrawal strategy, our fiduciary advisors can help you build a retirement plan that is both flexible and secure.
