How 3% Inflation Impacts Retirement Withdrawal Rates

No, the 4% rule isn’t autopilot, especially with steady 3% inflation

The 4% rule has great PR. Bill Bengen’s 1994 paper showed that a retiree starting at 4%, then adjusting that dollar amount for inflation each year, survived every 30-year stretch in the historical U.S. data he used. Useful? Absolutely. Guaranteed? Not even close. It was built on specific U.S. stock/bond returns and inflation paths. And the last few years reminded us that inflation isn’t a background character; it’s the script editor.

Quick reality check on the backdrop we’re living in right now. The CPI surge after the pandemic peaked at 9.1% year-over-year in June 2022 (BLS). Last year inflation cooled a lot, back toward the low-3% range. This year, retirees are planning around moderate, not-zero inflation, call it ~3% as a working number. That sounds tame. But it compounds. At 3% inflation, your purchasing power halves in roughly 24 years (Rule of 72: 72 ÷ 3 ≈ 24). That’s smack in the middle of a typical retirement. And yes, it sneaks up on you.

Here’s the part that trips people up: the 4% rule isn’t a fixed paycheck forever. It’s a starting rate with inflation adjustments. If you begin with a $1,000,000 portfolio, 4% is $40,000 in year one. If inflation runs 3%, the same lifestyle needs about $41,200 in year two, ~$42,400 in year three, and so on. But if you hold withdrawals flat at $40,000 because it feels “safe,” you’re accepting a silent pay cut every year. It’s not dramatic in month one. It’s very dramatic by year ten.

Personal note: I still remember clients in 2022 telling me, “We’ll just wait it out.” Fair. But the grocery bill didn’t wait. Neither did property insurance. Or travel costs. A fixed dollar draw was a diet you didn’t know you were on.

And because context matters, two more pieces. First, Bengen’s original analysis leaned on U.S. large-cap stocks and intermediate Treasuries over 50+ years of data through the early 90s; later updates sometimes suggest 4.5% or higher in certain mixes, but that’s not a blanket permission slip. Second, markets this year are mixed: cash and short Treasuries still carry positive real-ish yields around a few percent, while equities have been choppy after last year’s rebound. Sequence risk hasn’t left the building.

What you’ll get from this piece:

Why a fixed 4% draw without inflation bumps cuts your lifestyle every year
How 3% inflation compounds, and what it means over a 20-30 year horizon
What changed after the 2022 spike and the cooling trend last year, and what that means for 2025 planning
Simple guardrails to make a 4%-ish framework behave better when inflation isn’t zero

But one more thing I haven’t mentioned yet: taxes. We’ll get to them, because your “raise” for inflation is pre-tax. That’s where the math gets spicy fast, and where smart, boring tweaks can save real money.

How a steady 3% inflation rate rewrites your paycheck math

Inflation at 3% doesn’t sound scary until you translate it into how your bills creep, quietly, every single year. My take: a 3% assumption should be your default planning baseline right now, yes, this year, because it’s close to what markets are implicitly pricing for trend inflation after the post-2022 comedown. It’s not precise (it never is), but it’s the right ballpark for planning guardrails.

Rule of 72 is the napkin math that keeps me honest. At 3% inflation:

72 / 3 ≈ 24 years. Your purchasing power halves in roughly 24 years.

So an $80,000 lifestyle today feels like ~$40,000 in real terms by around year 24 if you never raise withdrawals. That’s not a rounding error, that’s a different life. And the drag shows up early too: a flat $40,000 annual draw is only worth about $29,800 in year 10 because (1.03)^10 ≈ 1.344, which is a ~25% haircut to your lifestyle, without you “doing” anything.

Flip it around: if you want to hold your lifestyle steady, you need inflation-adjusted withdrawals. Starting at $40,000 and bumping by 3% annually means:

Year 1: $40,000
Year 5: $40,000 × 1.03^4 ≈ $45,000
Year 10: $40,000 × 1.03^9 ≈ $53,900

That’s the raise your portfolio must fund just to stand still. Which leads to the uncomfortable but necessary reminder: real vs. nominal is what matters. A 6% nominal return with 3% inflation is about 3% real. After a modest 0.5%-0.75% in fees and friction, you’re closer to ~2.25%-2.5% real before taxes. Add taxes (we’ll talk about brackets and RMD quirks later), and you see why a steady, real withdrawal is tight. It’s doable in some mixes, sure, but it’s tight, and it gets tighter if your equity sleeve is doing the cha-cha rather than trending.

I know, I’m oversimplifying; returns aren’t flat lines, they bounce. And that’s exactly the problem. The same 3% inflation paired with early down markets increases failure risk even if long-run averages look fine. Sequence still runs the show. Quick example with round numbers: say you start with $1,000,000, draw $40,000 and inflation-bump it 3% each year, and your portfolio posts -12% and -8% in the first two years before reverting to a 6% nominal average after, that early one-two punch means you’re pulling bigger dollars from a smaller base, which leaves fewer chips on the table to compound when markets recover. On paper the 30-year average might still be 6%, in practice the path dependency can lop 5-10 percentage points off terminal wealth compared to a scenario where the bad years are at the end. I’ve seen that movie with real clients, and it’s never a feel-good ending.

Now, if you hold more cash or short Treasuries, this year they still sport positive “real-ish” yields, the near-term sequence risk softens a bit, but you’re also giving up some equity convexity. That’s the trade: smoother funding with less upside, or more upside with bumpier funding. There isn’t a perfect answer, it’s mostly about being honest about your tolerance and setting rules you’ll actually follow when screens are red and coffee’s cold.

Practical translation, no heroics:

Don’t mistake a flat withdrawal for stability. It’s a slow cut to lifestyle, about 25% less real spending power by year 10 at 3% inflation.
Target real returns, not headline returns. A 6% nominal world with 3% inflation funds roughly a 3% real spend before costs; after fees/taxes you need wiggle room.
Sequence is a feature, not a bug. Early losses + inflation-linked raises = higher failure odds; build cash buffers or guardrails to throttle withdrawals after bad years.
Re-check the math annually. If last year’s inflation was cooler than 3%, you can ease the bump; if it ran hot, you may need to trim somewhere else. It’s budgeting, not theology.

And because I promised: your inflation “raise” happens pre-tax, which means the IRS grabs its slice first. That’s where smart ordering of withdrawals can save real money, but I’m getting ahead of myself again. We’ll hit taxes right after the guardrails.

The ugly duo: sequence risk + inflation during your first 5-10 years

Here’s the gut punch a lot of glossy retirement charts hide: losses early in retirement are bad, but losses plus inflation-linked raises are the real problem. If you take a 4% first-year withdrawal, then bump it 3% for inflation, and the market drops 20% out of the gate, you’re suddenly selling more shares to fund the same real spending. More shares sold at lower prices = damage that sticks. And it sticks because those shares can’t compound in the rebound, you sold them. Sounds obvious; in practice, it’s brutal.

Quick numbers. Say you start with $1,000,000, pull $40,000, then inflation runs 3%. Year two target is ~$41,200. If your portfolio fell 20% to $800,000, that $41,200 is now a 5.15% draw. You’re not “just” drawing 4% anymore. You’ve moved the goalposts without meaning to. Do that for two bad years, think 1973-74 or, more recently, 2022 for stocks and bonds together, and the hole gets deep. In 2022, the S&P 500 fell about 18% on a total return basis while CPI ran 6.5% year-over-year by December (BLS, 2022). That combo is exactly the thing we’re talking about.

This isn’t just war stories. The Trinity Study (Cooley, Hubbard, Walz, 1998) and its updates show the “failure” cases for constant real withdrawals cluster when bad returns hit early and inflation isn’t trivial. Starts in 1929 and 1966 pop up repeatedly. In their 1998 paper, a 4% initial withdrawal with 50-75% stocks had historical 30-year success rates in the 90-95% ballpark for U.S. data from 1926-1995, but the near-misses and misses largely trace back to those early-sequence stinkers where inflation bit hard. The mid-1960s cohort ran into a nasty one-two punch: poor real equity returns and rising CPI. For context, CPI inflation averaged roughly 7-9% in parts of the 1970s (BLS historical tables), with 1974 alone around 11%, so your “raise” was big exactly when markets were down.

Early hits + ongoing inflation means you’re forced to sell more units at the worst time. And once those units are gone… they’re gone.

Practical 2025 takeaway: build a 5-10 year spending bridge in cash and short-duration bonds so a slump doesn’t coincide with forced selling plus 3% inflation bumps. Cash/T‑Bills and 1-3 year Treasuries are still yielding around the mid‑4% area earlier this year, drifting closer to ~4% as the Fed talks cuts into year-end. Rates move, yes, but even a 3.5-4.5% front-end gives you ballast. Personally, I like 5-7 years for core spending, then a couple more years of “flex” you can trim if markets sulk. Is that perfect? No. But it buys you time.

Guardrails help too. The Guyton‑Klinger rules (2006) basically say: after a poor year, pause the inflation raise or trim the withdrawal by a small percentage; after strong years, allow a bump. Their research showed much higher historical sustainability, often allowing starting rates above 4%, by reacting to returns instead of ignoring them. I’m oversimplifying the rules a bit, but the spirit is simple: you modulate. You don’t keep giving yourself a raise after a bad year just because the CPI print said so.

What to do now (Q4 2025): If your plan assumed 3% CPI and markets are wobbly, lock in 5-10 years of basic spending in cash/short bonds. Revisit quarterly; you don’t have to do it all at once.
Use triggers: If portfolio drops >20% from peak, pause the raise. If it recovers above a band, resume. Simple beats clever.
Be honest on taxes: That inflation raise is pre‑tax. Sequence + taxes can turn a 3% “raise” into a larger gross draw. Build that into the guardrail math.

One last thing, this feels conservative until you live through it. Then it feels like oxygen. I’ve watched clients who bridged those first 5-10 years sleep fine during ugly tapes. And the folks who didn’t… well, they learned quickly why early years carry outsized weight.

Setting a withdrawal policy that works in a 3% world

Alright, here’s the practical toolkit. Moderate inflation (~3%) and real yields that aren’t zero anymore change the math, but the trade‑offs are the same: what you spend, what you earn, and how flexible you’re willing to be. I’ll give you a few frameworks, from dead‑simple to more adaptive. And if this starts to get too granular… yeah, I know. I’ll circle back after each one with the plain‑English takeaway.

1) Baseline: inflation‑adjusted fixed‑dollar rule

Start rate: 3.5%-4.0% of your starting portfolio, then adjust that dollar amount each year by CPI. The classic Bengen (1994) “4% rule” assumed ~50-75% equities, 30‑year horizon, CPI indexing, and worked historically in U.S. data. Given sequence risk and taxes, I like 3.5%-3.8% if you’re retiring in your early‑mid 60s and want high confidence; closer to 4.0% if you’re late 60s+, moderate equity, and can trim if needed.
Why it fits a 3% world: Real yields aren’t zero anymore. 10‑year TIPS spent much of 2024-2025 near ~2% real (give or take). That supports a non‑crazy inflation‑linked spending rule without betting the farm on equities.
Trade‑off: It’s rigid on raises. If markets lag two years in a row, you may need to pause the CPI bump. That’s the belt‑tightening part I mentioned earlier… not fun, but survivable.

Plain English: Start around 3.5%-4.0%, give yourself CPI raises, but be willing to skip one after a rough patch.

2) Guardrails: start ~4%, then steer by “zones”

How it works: Set an initial withdrawal (say 4%). Monitor your current withdrawal rate (= this year’s dollar draw ÷ current portfolio). If that rate drifts above an upper guardrail, cut the draw by a set percentage (often 10%). If it falls below a lower guardrail, give yourself a raise.
Common spec: The Guyton‑Klinger (2006) framework used 20% bands around the initial rate and 10% raise/cut rules. Historical backtests showed high success rates over 30‑year horizons with ~60/40 mixes when rules were followed. It’s not magic, it’s just disciplined throttle control.
Why now: With equities choppy this year and real yields positive, guardrails help you avoid over‑spending near a market peak and under‑spending after a drawdown.

Plain English: Start near 4%. If markets push your effective rate too high, trim a bit; if you’re safely low, give yourself a raise. Simple beats clever.

3) Floor‑and‑upside: lock the essentials, flex the fun

Floor: Cover non‑negotiables (housing, food, baseline healthcare) with guaranteed income: Social Security, pensions, and possibly an annuity. The SSA’s own figures show Social Security replaces roughly ~40% of pre‑retirement earnings for average earners (varies by income and claiming age). SPIAs in recent years have offered mid‑single‑digit payout rates at age 65; quotes move with rates and mortality, so get fresh bids.
Upside: Use your portfolio for discretionary spending with a flexible COLA. If markets underperform, trim trips and toys; if markets run, turn the knob up.

Plain English: Essentials are on autopilot; everything else breathes with markets. This is how many clients actually sleep at night.

4) Dynamic COLA: cap raises, make up later

Rule: Each year, increase spending by the lesser of CPI or a plan cap (2%-3% works fine). After strong years (e.g., real returns >X% and funded ratio above target), grant a make‑up raise to catch up part of what you capped.
Why it helps: Last year’s full‑year CPI ran ~3.4% (2024), and 2025 inflation has hovered closer to the ~3% zip code. A hard 3% auto‑raise can outrun portfolio reality during flat or down periods. The cap keeps spending honest; the make‑up preserves living‑standard momentum when markets cooperate.

Plain English: Don’t force a raise after a bad year; do catch up when returns give you room.

Picking one (and being honest about the gray areas)

If you want set‑it‑and‑almost‑forget‑it: Fixed‑dollar CPI rule at 3.5%-3.8% starting rate, with a pause trigger after big drawdowns.
If you want hands‑on control: Guardrails with 20% bands and 10% raise/cut rules, reviewed quarterly.
If you want sleep insurance: Floor‑and‑upside plus a Dynamic COLA on the discretionary bucket.

Real talk: none of these is perfect. I’ve run them in spreadsheets and with real families for two decades, and there are years you’ll second‑guess. Markets don’t read our plans. But with 10‑year TIPS near ~2% real and CPI around ~3% this year, these frameworks actually pencil. And if I sounded too certain anywhere… I’m not. We course‑correct. That’s the point.

Portfolio moves that actually help: real returns, not magic tricks

Okay, brass tacks. Inflation around ~3% this year isn’t “high” like 2022, but it’s sticky enough that it quietly eats your paycheck from your portfolio. That means you need assets that either keep up with CPI by design, or historically outrun it by a decent margin, without blowing up your risk budget. Here’s what actually moves the needle in a 3% world.

TIPS for real spending. Treasury Inflation‑Protected Securities literally link principal and coupons to CPI. Not a metaphor, your cashflows adjust with the index. With 10‑year TIPS yields hovering around ~2.0%-2.2% real in September-October 2025 (they were ~2.0% in early September), you can lock a real return that covers most of a 2%-3% inflation backdrop without having to guess the Fed’s next move. For core, non‑discretionary expenses, a TIPS ladder covering the first 7-12 years of withdrawals can turn “worry about prices” into “check the maturity schedule.” Pro tip from too many client meetings: align maturities with property taxes, Medicare premiums, and annual travel that you truly won’t cut.
Equities remain the engine. Over long horizons, stocks are still how you grow purchasing power. The S&P 500 has delivered roughly 6%-7% real annualized over many decades (data vary by window; long‑run studies often cite ~6.5% real since the mid‑20th century). But I’m not blind to valuations: as of September 2025, the S&P 500 forward P/E sits near ~20-21 by most sell‑side aggregates, which is above its long‑term median. Translation: still own equities, but don’t bet the farm on one country. A 60/40 U.S./ex‑U.S. equity mix, or even a simple ACWI tracker, lowers the single‑market valuation risk. If U.S. multiples compress, international and small value pockets can do some heavy lifting.
Manage duration on your bonds. When inflation sits at ~3% and policy rates are restrictive, you want enough duration to capture carry and potential rally, but not so much that a rate surprise dents your real return. Practical version: blend short‑term Treasuries (or high‑quality ultra‑short) with intermediate Treasuries and TIPS. I like a 1-5 year sleeve for liquidity + a 5-10 year TIPS sleeve for inflation linkage. This barbell keeps interest‑rate sensitivity in check while preserving that CPI hedge.
Real assets, selectively. REITs and broad commodities can buffer inflation shocks, but they come with cycles. From 2000-2023, U.S. REITs posted ~8%-9% annualized nominal returns with meaningful drawdowns (2008, 2020), and commodities had multi‑year winters between spikes. In other words, use them as seasoning, not the entrée. A 5%-10% combined allocation can help when energy or rents push CPI, but you have to live with volatility and the occasional “why do we own this?” quarter.
Annuities with COLA riders. If you want a floor that rises with prices, immediate annuities with an annual cost‑of‑living adjustment can do that job. Reality check: the inflation protection isn’t free. In 2025 quote runs, a 65‑year‑old couple buying a lifetime income annuity with a 3% annual COLA often sees initial payouts ~25%-35% lower than a level (no‑COLA) version, though the COLA version can surpass the level income after roughly 10-14 years depending on actual inflation and crediting. Shop on insurer credit quality (A or better), exact COLA terms (fixed 2%-3% vs CPI‑linked caps), and total fees/spreads embedded in quotes. Get two or three bids; this market is quirky.

Small detour because I care way too much about this stuff: a portfolio that beats inflation on paper isn’t the same as a portfolio that funds your groceries in March and your roof in July. Match cashflows. Then improve returns. In that order. I’ve messed this up early in my career and it’s not fun explaining why “expected return” didn’t pay a property tax bill.

Now, a bit of over‑explaining before the point: we often chase the single “best” asset for inflation. There isn’t one. TIPS hedge measured CPI. Equities grow real wealth over time. Nominal bonds stabilize near‑term spending if you keep duration sane. Real assets punch during shocks. Annuities transform sequence risk into insurer risk. Okay, here’s the point: combine them intentionally, and your withdrawal plan breathes with inflation rather than fighting it.

A simple map for a 3% world

Fund 5-10 years of essential withdrawals with a TIPS ladder and short‑term Treasuries. At ~2% real on 10‑year TIPS in 2025, you’re covering most of the inflation math upfront.
Keep 40%-60% in global equities for long‑horizon real growth; tilt toward factors you can stick with (quality, value) if U.S. multiples feel rich.
Leave 5%-10% for real assets if you can handle the bumps.
If sleep is expensive, price a modest COLA annuity to cover a base layer, just verify costs and the insurer’s balance sheet.

One last reality check: CPI is running roughly ~3% year‑over‑year in recent prints this year, but your personal inflation, healthcare, taxes, travel, may be 4%+. Build your floor to your CPI, not the headline. That’s how you sustain real withdrawals without magic tricks, just boring, reliable math.

Taxes, COLAs, and healthcare: the inflation spillovers retirees feel first

Okay, real talk, 3% headline inflation feels manageable until you watch how it drips into taxes, Social Security COLAs, and Medicare. These are the spots where a benign CPI can still nick real spending. I’ve seen more retiree budgets surprised by IRMAA letters than by groceries. Not kidding.

Tax brackets: indexed helps, but not everywhere

The IRS indexes federal income tax brackets and the standard deduction each year. That indexing helps reduce “bracket creep” when nominal income rises roughly with inflation. The standard deduction and each bracket’s dollar width adjust annually, which is good planning news for 2025. But a few important thresholds don’t behave as nicely:

NIIT thresholds are not indexed: The 3.8% Net Investment Income Tax kicks in at $200,000 of modified AGI for single filers and $250,000 for married filing jointly, levels set back in 2013 and still the same. So a retiree with sizable dividends, interest, capital gains, or a one-time Roth conversion can drift into NIIT even when brackets push out. That’s stealth inflation, in tax clothing.
Medicare IRMAA tiers: These income-related Medicare premium brackets are adjusted, but they’re cliff thresholds and can move in uneven steps relative to your income growth. Cross a tier by $1 and your Part B and Part D premiums jump for the whole year. I watched a client miss a Roth-conversion target by a hair and pay a few hundred dollars more per person, not fun mail to open.

Social Security COLA: helpful buffer, not a portfolio replacement

Social Security sets annual COLAs using CPI-W. For reference: benefits rose 3.2% for 2024 (announced in 2023) and 3.2% for 2025 (announced in 2024). That’s a decent cushion against a 3% world; it keeps purchasing power from sliding too fast. But it’s not designed to replace portfolio returns or cover higher-cost categories that outpace CPI.

Quick facts: Social Security COLA uses CPI-W; 2024 = 3.2%, 2025 = 3.2%. NIIT thresholds: $200k single / $250k MFJ since 2013.

Healthcare: inflation runs hotter, especially later in retirement

Medical costs often run above headline CPI in many years, and the sticker shock tends to show up more in your 70s and 80s when utilization rises. Even when the official “health insurance” CPI jiggles due to methodology tweaks, what retirees pay, premiums, co-pays, out-of-pocket meds, often trends higher than 3%. I typically model late-retirement medical inflation a point or two above headline CPI. Is it perfect? Nope. But it’s more honest than assuming healthcare behaves like milk and eggs; it doesn’t.

Make taxes work for you: sequence and smart levers

Account sequencing: A common order is taxable → tax-deferred → Roth. Spend dividends/cap-gains and basis first to keep AGI flexible; preserve tax-deferred for later but mind RMDs (age 73 under current rules); keep Roth for last-dollar, high-flexibility spending.
Roth conversions in low-income years: Fill the lower brackets in gap years (post-retirement, pre-RMD, pre-Social Security) to reduce future RMDs and potential IRMAA/NIIT exposure. Watch the IRMAA cliffs when picking your conversion size.
QCDs at 70½: Qualified Charitable Distributions from IRAs (up to $100,000 per person per year; indexed starting 2024) satisfy RMDs once they start, keep AGI lower, and can help avoid IRMAA thresholds. Clean, simple, and, if you’re giving anyway, tax-efficient.
Asset location: Put tax-inefficient income (taxable bonds, REITs) in tax-deferred accounts when feasible; reserve Roth space for higher-growth or higher-turnover assets you expect to compound tax-free. Small changes here preserve real, after-tax income over long horizons.

Bottom line for 2025 planning: 3% CPI doesn’t mean 3% everything. Taxes drift in through thresholds you don’t see; COLA helps but won’t replace portfolio returns; healthcare demands a fatter cushion. Build your cash flows around after-tax income and a slightly higher medical inflation line. I keep a post-it that says: “Mind IRMAA, NIIT, RMDs, then breathe.” It’s not poetry; it works.

If you treat 3% like “no big deal,” here’s what breaks

Three percent sounds tiny. It isn’t. At 3% inflation, your costs double in about 24 years (Rule of 72). In practice, it shows up as the slow squeeze: groceries feel 10-15% higher than “a few years ago,” supplemental premiums drift up, property taxes tick higher, travel sneaks from $5,000 to $6,500. If your withdrawals are set-and-forget with rigid 3% raises no matter the market, you’re basically promising future-you a lifestyle cut or a higher odds of running out of money early. That’s not dramatic; it’s math.

Here’s the pinch people miss: if markets are flat or negative for a couple years and you still give yourself that annual 3% raise, the withdrawal rate on your shrunken portfolio jumps. Do that long enough and sequence risk does the rest. Wade Pfau’s work (2013-2021 updates) shows that safe initial withdrawal rates fall toward ~3.0-3.3% for long retirements when early returns are weak or valuations are rich, well below the old “4% in all seasons” myth. And when you add variability in inflation, say one year at 6-8% like we saw in 2022 (BLS CPI-U: +8.0% in 2022), followed by ~3% years, the cumulative gap is large even if today feels calmer.

On the flip side, refusing to adapt in bad markets, insisting on the full raise, can be just as harmful as ignoring raises forever. Without a simple policy, most households overspend in bull years (because it feels safe) and then can’t bring themselves to cut in bear years (because it feels awful). I’ve watched this movie since 2003. It ends the same way: higher withdrawal rates at the worst time.

There’s also the tax creep that hides in plain sight. The standard Medicare Part B premium and IRMAA surcharges step up at income thresholds; hit a bracket and your after-tax, after-premium income drops. For reference, 2024’s first IRMAA bracket starts at modified AGI above $194,000 (single $103,000) for 2026 premiums, and the highest Part B premium in 2024 runs north of $500/month per person when surcharges apply (CMS, 2024). Different year, same point: one “extra” capital gain can turn a 3% cost-of-living year into a 6-8% after-tax year. It’s not linear. I know, annoying.

So what to do this quarter in 2025? Keep it boring and explicit:

Pick a withdrawal framework: Static real (with inflation), guardrails, floor-and-upside, pick one. The Guyton-Klinger guardrails (2006) are a solid starting point: set an initial rate (say 3.8-4.2% depending on your mix), then only give raises when the portfolio is healthy, and cut by a small percentage if it breaches bands (commonly ±20% bands around target income). Oversimplifying, but the rules force small, timely course-corrections.
Set explicit guardrails: For example, “If withdrawal rate exceeds 5.0% on current portfolio value, reduce spending 5-10%; if it falls below 3.0%, allow a raise next January.” Write it down. Future-you will ignore vague intentions; they usually don’t ignore rules on paper.
Fund a multi-year reserve: Hold 2-4 years of core spending needs in cash/T-bills/TIPS ladders. With 10-year TIPS real yields around ~2% this year, a 2-3 year TIPS ladder can cover your baseline and buy time in a drawdown without selling stocks low.
Audit taxes and IRMAA before year-end: Model 2025 realized income now. Check capital gains distributions, Roth conversions, QCDs from IRAs (remember, QCDs count toward RMDs once they start and keep AGI lower), and where you sit relative to IRMAA thresholds. Small shifts, harvesting losses, deferring income a few weeks, directing charitable gifts via QCD, can keep you under a bracket.

One more plain-English point. If you do nothing, you aren’t “staying the course.” You’re choosing between stealth austerity later (same dollars buying less every year) or bigger portfolio stress now (higher withdrawal rate when markets are wobbly). Neither is fun, I promise. Better to accept small, rule-based nudges in 2025 while markets are… fine-ish, than a hard reset in 2027 when you least want it.

Treat 3% with respect. Write the rules, set the rails, pre-fund a few years, and check taxes while you can still fix them.

Frequently Asked Questions

Q: How do I adjust the 4% rule if inflation runs around 3% and markets get choppy?

A: Treat 4% as a starting bid, not a promise. Practical tweaks I use with clients: 1) Set guardrails: if your portfolio falls 20% from its high, skip or cap the inflation raise that year (e.g., max 1-2% instead of 3%) and limit withdrawals to a fixed percent (say 4% of current balance). When the portfolio recovers, resume full inflation bumps. 2) Cap COLA: in normal years, raise by CPI (or 3% as a proxy). In down years, use 0-1% or skip. 3) Keep 1-2 years of core spending in cash/short T‑bills so you’re not selling stocks at bad prices. 4) Rebalance annually to your target mix so you’re trimming winners, not reacting emotionally. 5) Be tax‑smart: spend taxable first (harvest losses/gains smartly), consider Roth conversions in low‑income years before RMDs, and coordinate withdrawals with Social Security timing. Imperfect? Sure. But it keeps the plan alive when inflation and markets don’t cooperate.

Q: What’s the difference between keeping my withdrawals flat versus inflation-adjusting them?

A: Flat withdrawals feel safe but create a sneaky pay cut. Example: start at $40,000. With 3% inflation, “same lifestyle” costs about $53,800 by year 10. Holding at $40,000 means ~26% less purchasing power. Inflation-adjusting to $53,800 preserves lifestyle but raises sequence risk if markets are weak. That’s why many retirees do conditional raises, full inflation bumps in good years, smaller or skipped raises in bad years, so they don’t lock in big withdrawals after losses.

Q: Is it better to tilt toward bonds or TIPS when inflation is ~3%?

A: They do different jobs. Core high‑quality bonds dampen volatility and fund 2-4 years of spending; TIPS directly hedge inflation. A blend often works: keep your near‑term spending bucket in cash/short Treasuries, hold intermediate Treasuries or investment‑grade bonds for ballast, and layer TIPS (or a simple 5-10 year TIPS ladder) to match essential expenses. I Bonds are a nice add‑on for tax‑deferred inflation protection (purchase limits apply). With real yields positive lately, TIPS can lock in inflation‑adjusted income; just match maturities to your spending years so you’re not guessing on price moves.

Q: Should I worry about running out of money if I stick to 4% with 3% inflation? What are the alternatives?

A: Worry a little, plan a lot. 4% survived many past paths, but it’s not a guarantee. Alternatives I actually like in practice: 1) Guardrail rules (Guyton‑Klinger style): start near 4%, give yourself pay raises with inflation, but cut 5-10% if a withdrawal rate threshold is breached; raise again after recoveries. 2) Floor‑and‑upside: cover essentials with Social Security + a low‑cost SPIA or TIPS ladder, then invest the rest for growth and discretionary spend. 3) Variable spending: tie withdrawals to a % of the current portfolio (e.g., 3.8-4.5%) with a collar so income can’t change by more than, say, ±10% year to year. 4) Timing levers: delay Social Security to 70 to raise guaranteed income, do Roth conversions before RMD age, and trim big, lumpy costs in bear markets. I watched in 2022 how a small, temporary cut plus a cash buffer kept clients from selling stocks at the worst time, uncomfortable, yes, but it protected the plan.

@article{how-3-inflation-impacts-retirement-withdrawal-rates,
    title   = {How 3% Inflation Impacts Retirement Withdrawal Rates},
    author  = {Beeri Sparks},
    year    = {2025},
    journal = {Bankpointe},
    url     = {https://bankpointe.com/articles/3-percent-inflation-withdrawals/}
}