The 3.7% Rule is the New 4% Rule: Why Your Retirement Calculator is Lying to You

The retirement calculator you’re relying on might be silently sabotaging your financial future—and the culprit is an outdated rule created when Ronald Reagan was still president.

Millions of Americans continue to base their retirement planning strategy on the traditional 4% rule, despite dramatic shifts in interest rates, market valuations, inflation patterns, and life expectancy over the past three decades.

This blind spot could mean the difference between sustainable retirement income and running out of money when you need it most.

In this guide, you’ll discover how the emerging 3.7% rule provides a more realistic withdrawal strategy for today’s economic environment, why this seemingly small adjustment makes an enormous difference over time, and how to implement this updated approach without sacrificing your quality of life.

Your retirement security depends on recognizing when conventional wisdom becomes dangerous—and that time is now.

The 4% Rule: Why This 1994 Standard No Longer Works in 2025

When financial advisor William Bengen published his groundbreaking research in 1994, he introduced what would become retirement planning’s most sacred number.

His traditional 4% rule suggested retirees could safely withdraw 4% of their initial portfolio in year one, then adjust that amount for inflation annually, with minimal risk of running out of money over a 30-year retirement.

Bengen’s analysis wasn’t arbitrary—it was grounded in robust historical data. His research examined every 30-year period from 1926 through the early 1990s, including the Great Depression and numerous bear markets.

The economic conditions underpinning his work included average stock market returns of 7-8% and Treasury bond yields of 5-6%. Under these circumstances, the 4% safe withdrawal rate worked remarkably well.

For decades, this William Bengen retirement strategy remained unchallenged as the gold standard. Even during the dot-com crash and 2008 financial crisis, portfolios following the 4% rule generally survived—though not without significant stress during those periods.

However, the economic landscape has fundamentally changed. The 10-year Treasury yield averaged 7.3% when Bengen conducted his research; in early 2025, it hovers around 4.1%. Meanwhile, equity valuations as measured by the CAPE ratio (Cyclically Adjusted Price-to-Earnings) have nearly doubled, from an average of 15.3 in Bengen’s study period to approximately 29 today—suggesting lower future returns.

Perhaps most tellingly, Bengen himself has reconsidered his famous rule. In a 2021 interview with Morningstar, he acknowledged that “the world has changed” and suggested that withdrawal rates between 3.5% and 4% might be more appropriate.

By 2023, he had further refined his thinking, noting that for today’s retirees, “a safe withdrawal rate history must account for unprecedented valuation levels and extended longevity.”

Why 3.7% Is the New Gold Standard for Retirement Withdrawals

Morningstar’s comprehensive 2024 study on sustainable withdrawal rates sent shockwaves through the financial planning community.

After analyzing over 750,000 simulated retirement scenarios incorporating current market conditions, their research team concluded that 3.7% represents the optimal withdrawal rate for retirees seeking a 90% probability of portfolio survival over 30 years.

This finding aligns with similar forecasts from major asset managers. Vanguard’s 2025 Economic and Market Outlook projects 10-year annualized returns for a balanced 60/40 portfolio at just 5.1%—significantly below historical averages. BlackRock’s projections are even more conservative, suggesting 4.8% returns for the same allocation.

When these reduced return expectations are incorporated into retirement models, the 4% rule’s failure rate jumps from its historical 5% to nearly 22%.

The mathematical modeling is compelling. A Monte Carlo simulation using current market parameters shows that a $1 million portfolio using the 4% rule ($40,000 initial withdrawal, adjusted for inflation) has a 22% chance of depletion before 30 years.

Reducing the withdrawal rate to 3.7% ($37,000 initial withdrawal) drops the failure rate to below 10%—the threshold most financial planners consider acceptable.

This seemingly small 0.3% adjustment becomes magnified through what retirement researchers call “sequence of returns risk”—the heightened vulnerability of portfolios to market downturns in early retirement years.

Dr. Wade Pfau’s research demonstrates that retirees who began withdrawals in 2000 or 2008 using the 4% rule experienced dramatically worse outcomes

Than those who retired during bull markets. His modeling shows the 3.7% rule provides critical additional protection against this sequence risk by creating a larger buffer against early market declines.

The retirement portfolio sustainability difference becomes even more pronounced when extended longevity is factored in. With couples retiring at 65 today having a nearly 50% chance of one spouse living beyond 90, the traditional 30-year retirement window may be insufficient.

The 3.7% rule extends the portfolio’s probable survival by an additional 5-7 years—critical protection against longevity risk that today’s retirees cannot afford to ignore.

How Retirement Calculators Are Setting You Up for Failure

The retirement calculator you trust may be quietly leading you toward financial disaster. A 2024 analysis of the five most popular retirement planning tools revealed alarming deficiencies—all five continue to use default annual return assumptions of 6-8%, despite major financial institutions projecting average balanced portfolio returns closer to 5% for the coming decade.

Fidelity’s Retirement Score calculator, used by over 9 million Americans, defaults to a 7.5% annual return for growth portfolios—a figure that hasn’t consistently materialized for balanced portfolios since the 1990s.

Similarly, Vanguard’s tool assumes 7% for stock-heavy allocations, while T. Rowe Price’s retirement income calculator defaults to projections that exceed their own investment committee’s internal forecasts by nearly a full percentage point.

These retirement planning tools compound their errors by underestimating longevity risk.

The Society of Actuaries now reports that a 65-year-old couple has a 49% chance of at least one spouse reaching 95—yet most calculators still default to end-of-plan ages of 90 or 92. Meanwhile, healthcare inflation, projected by Fidelity Healthcare to run 1.5-2% above general inflation through the 2030s, remains largely unaccounted for in standard projections.

The financial projection errors grow exponentially over time. A seemingly minor 0.3% miscalculation in withdrawal rates—choosing 4% instead of 3.7%—translates to depleting a $1 million portfolio nearly four years earlier.

Over 30 years, this seemingly trivial difference compounds to approximately $430,000 in lost potential retirement funds for the average retiree.

Perhaps most troubling is the false retirement calculator accuracy promised by precise-looking projections. When Financial Planning magazine tested 12 popular calculators with identical inputs, the projected retirement shortfalls varied by over $800,000 between the most optimistic and pessimistic tools.

This extreme variance reveals a disturbing truth: your retirement security may depend more on which calculator you happen to use than on your actual financial situation.

How to Apply the 3.7% Retirement Rule to Your Portfolio

Implementing the 3.7% retirement withdrawal strategy requires precision, not guesswork. Begin with your total retirement portfolio value across all accounts (excluding emergency funds), and multiply by 0.037. This gives you your first-year sustainable withdrawal amount—for a $1 million portfolio, that’s $37,000.

For inflation adjustments, resist the temptation to automatically increase withdrawals by the headline CPI figure each January. Instead, adopt a personalized inflation approach based on your actual spending patterns.

The Bureau of Labor Statistics Senior Consumer Price Index often provides a more accurate inflation measure for retirees, typically running 0.2-0.5% lower than standard CPI due to different spending weights in healthcare, housing, and transportation.

Your asset allocation significantly impacts sustainable withdrawal rates. Research by financial planner Michael Kitces demonstrates that portfolios with equity allocations below 40% or above 80% actually reduce safe withdrawal rates.

For optimal results with the 3.7% approach, maintain 50-70% in equities throughout retirement, contrary to conventional wisdom that suggests becoming increasingly conservative with age.

Implementation varies based on your retirement stage. Pre-retirees should stress-test their savings targets using the 3.7% rule a $1 million portfolio generates $37,000 annually, so working backward, multiply your desired retirement income by 27 (1 ÷ 0.037) to find your required nest egg.

Already retired? Don’t panic if you’ve been using the 4% rule. Instead, skip one or two inflation adjustments to gradually realign with the 3.7% path.

For tax efficiency, coordinate your retirement distribution planning across account types. Withdraw from taxable accounts first while markets are strong, tactical Roth conversions during market downturns, and required minimum distributions (RMDs) from tax-deferred accounts last.

This sequencing can add 5-7 years of portfolio longevity compared to withdrawing proportionally across all accounts, according to research from Vanguard’s retirement income planning team.

Dynamic Strategies That Complement the 3.7% Retirement Rule

While the 3.7% rule provides a solid foundation, the most resilient retirement income strategies incorporate flexibility. The “guardrails” approach, pioneered by financial researcher Jonathan Guyton, allows withdrawal rates to float between upper and lower boundaries based on portfolio performance.

When implemented alongside the 3.7% baseline, this flexible retirement withdrawal system permits up to 10% increases in spending after strong market years while triggering 10% reductions following significant downturns—dramatically improving portfolio survival rates.

Guaranteed income sources create critical stability beneath this flexible framework. Social Security optimization alone can increase lifetime benefits by $100,000+ for married couples through delayed claiming strategies.

For those seeking additional security, single premium immediate annuities (SPIAs) covering essential expenses can provide insurance against market volatility and longevity risk.

Recent innovations in buffer annuities offer downside protection while maintaining substantial upside potential—options worth exploring for 10-20% of retirement assets.

The retirement income buckets model further enhances the 3.7% approach by segregating expenses into essential, lifestyle, and legacy categories.

Financial planner Christine Benz suggests allocating guaranteed income sources (Social Security, pensions, annuities) to cover all essential expenses, the 3.7% systematic withdrawals for lifestyle spending, and growth-oriented investments for legacy goals—creating psychological comfort while maintaining mathematical rigor.

When market conditions change significantly, these dynamic systems require recalibration.

The 2023 Retirement Income Consortium study found that retirees who worked with certified financial planners implementing dynamic withdrawal strategies navigated the 2022 market downturn with 42% less anxiety and made 67% fewer emotionally-driven portfolio adjustments than self-directed retirees.

For portfolios exceeding $500,000 or situations involving complicated tax scenarios, the data increasingly supports the value of professional guidance focused specifically on distribution-phase planning rather than accumulation strategies.