For years, the Four Percent Rule has been a retirement planning staple. Originating in the US in the 1990s, it offered a simple formula: withdraw 4% of your retirement nest egg each year and your money should last at least 30 years. But with Australia’s unique superannuation system, changing economic conditions, and new government policies in 2025, many are asking: does the rule still hold up for Australians?
How the Four Percent Rule Works—and Its Origins
The Four Percent Rule was popularised by financial planner William Bengen, who analysed historical market returns and concluded that retirees could safely withdraw 4% of their portfolio in the first year of retirement, adjusting for inflation each year thereafter. The idea was to balance sustainable withdrawals with the risk of outliving your savings.
- Example: If you retire with $800,000, the rule suggests a $32,000 first-year withdrawal.
- Subsequent withdrawals are adjusted for inflation, not market performance.
- The rule assumes a diversified portfolio (typically 50-60% equities, 40-50% bonds).
But Australia’s financial landscape is different. Superannuation, the Age Pension, and unique tax rules all influence how long your savings will last.
2025 Policy Updates and Market Realities
This year, several factors are reshaping the retirement equation:
- Rising Life Expectancy: The average Australian can now expect to live well into their mid-80s, with many living past 90. This means retirement savings need to stretch further.
- Inflation Uncertainty: After a period of high inflation in the early 2020s, the RBA forecasts inflation to stabilise at 2.5% in 2025. However, many retirees remain wary, especially given the recent volatility in living costs.
- Superannuation Changes: The Superannuation Guarantee rate has now reached 12%, and new drawdown flexibility introduced in July 2024 allows retirees more control over their income streams.
- Age Pension Adjustments: The means test thresholds have been lifted, enabling more part-pensioners to supplement their income without losing benefits.
- Market Returns: The ASX 200’s 10-year annualised return is currently tracking near 7%, but bond yields remain subdued, challenging the classic balanced portfolio assumptions.
All of this means the Four Percent Rule is being stress-tested like never before.
Does the Four Percent Rule Work for Australians in 2025?
Here’s how the Four Percent Rule stacks up against today’s realities:
- Longevity Risk: Living longer means a 30-year retirement horizon may be conservative. Many financial planners now recommend planning for 35-40 years of income.
- Market Volatility: With interest rates still below historical averages and share markets more volatile, a 4% withdrawal may deplete portfolios faster than anticipated if markets underperform early in retirement.
- Superannuation Drawdowns: The new rules let retirees vary their drawdowns more flexibly. This can be beneficial, but it also puts more onus on individuals to manage their own longevity risk.
- Age Pension Buffer: The Age Pension acts as a safety net. For many, it reduces the risk of running out of money entirely, but it also means the withdrawal rate can be adjusted based on eligibility and assets.
Case Study: Anna, 67, retires in Melbourne with $600,000 in super and a part-pension. Using the Four Percent Rule, she’d withdraw $24,000 in her first year, plus her pension. But by working part-time for a few more years, she delays drawing down her super, benefits from further compounding, and ultimately enjoys a higher, safer withdrawal rate.
Adapting the Rule: Smarter Strategies for 2025
Many Australian retirees and advisers are now tweaking the Four Percent Rule, rather than abandoning it:
- Lower Initial Withdrawals: Some now start at 3.5% to increase portfolio longevity, especially for those retiring before age 67.
- Dynamic Withdrawals: Adjusting withdrawals based on market performance—taking less in poor years, more in good years—can help smooth outcomes.
- Bucket Strategies: Keeping 2-3 years of cash or short-term bonds to cover withdrawals during downturns avoids selling shares at a loss.
- Blending with Pension: Factoring in the Age Pension and any other income streams (like annuities or part-time work) can provide a more robust plan.
Ultimately, the Four Percent Rule is best seen as a starting point. It provides a useful benchmark, but the right withdrawal rate depends on your age, risk tolerance, investment mix, and eligibility for government support.
Conclusion: The Four Percent Rule—Still a Guide, Not a Guarantee
For Australians retiring in 2025, the Four Percent Rule remains a handy reference—but it’s no longer a “set and forget” solution. With longer lifespans, policy changes, and market unpredictability, flexibility is key. Reviewing your withdrawal strategy regularly, considering the Age Pension, and being willing to adjust based on circumstances will help ensure your retirement savings go the distance.
