Does 3% Inflation Change the 4% Rule? Avoid This Mistake

The pricey retirement mistake: treating 4% like it’s fixed income

Here’s the quiet error that blows up more plans than any fancy hedge ever will: treating the 4% rule like a guaranteed coupon. It isn’t a bond payment. It’s a starting posture that has to flex with inflation, market returns, taxes, and fees. Put withdrawals on autopilot without those adjustments and you’re basically promising yourself a slow pay cut in real terms. Painful, and avoidable.

Quick refresher, and I’ll keep the jargon light: the 4% rule, Bengen’s 1994 work, later echoed by the Trinity Study, was built on inflation-adjusted withdrawals. You start at 4% of your portfolio in year one, then you raise the dollar amount each year by inflation, regardless of market returns. That’s the part folks skip. Don’t ratchet up for inflation and your purchasing power erodes. Fast? Not overnight. But steadily.

“Is 3% inflation a big deal in 2025?” Good question. Short answer: yes. Headline CPI has been hovering near 3% this year (BLS monthly prints bounced around that neighborhood), and at 3% your cost of living doubles in roughly 24 years (Rule of 72: 72 ÷ 3 ≈ 24). Over a 30-year retirement, that’s not theoretical, it’s your grocery bill, your Medicare premiums, your roof. If you keep withdrawals flat at, say, $40,000 and don’t inflation-adjust, after 10 years at 3% that buys about what $29,800 buys today (40,000 ÷ 1.03^10). That’s a big haircut.

And here’s the part people underestimate even more: sequence-of-returns risk. Jargon alert, sorry. What I mean is the order of returns early in retirement matters more than the average. If you retired in January 2022 and pulled 4% while markets fell, you felt this in your gut. In 2022, the S&P 500 dropped about −18% and the Bloomberg U.S. Aggregate Bond Index fell roughly −13%, a rare double drawdown in the same year. Withdrawals during that kind of start can dwarf the difference between 2% and 3% inflation in the math. Yea, it’s that harsh.

2025 reality check: inflation’s lower than the 2022 spike, but it’s not zero; Treasury yields are still higher than the 2010s norm; and taxes, well, they’re not optional. A 1% all-in fee drag (advice + funds) quietly eats one quarter of a 4% withdrawal right off the top. And if most of your spending comes from pre-tax accounts, the IRS gets paid before you do. The 4% rule didn’t assume free investing or tax amnesia.

So what will you actually learn here? Three things: (1) why the biggest mistake is setting withdrawals to autopilot without inflation and market awareness, (2) how the original rule intended year-by-year inflation raises and what skipping them does to your lifestyle, and (3) why early-market losses, sequence risk, can matter more than the average inflation line you see on TV. We’ll also grapple with the practical version of that reader-favorite search, “does 3% inflation change the 4% rule?” The honest answer is: it changes how you apply it. The rule was never a promise. It’s a disciplined starting point that you adjust, firmly, when inflation, returns, taxes, and fees move the goalposts.

Bottom line: 4% isn’t a guarantee. It’s a plan that breathes. If your plan isn’t breathing with 2025 inflation and markets, it’s suffocating.

What the 4% rule actually says (and what it doesn’t)

Here’s the clean version before we argue about it. In 1994, Bill Bengen studied U.S. market history and asked a narrow question: what initial withdrawal rate, then raised for inflation every single year, would have survived the worst 30-year retirements in the data? Using U.S. large-cap stocks and intermediate-term Treasuries, 50-75% in stocks, and annual rebalancing, he found 4.0% worked across all 30-year start dates in the sample (1926-1976 starts; paper published 1994). The worst case was a 1966 retiree who ran into high inflation and ugly stock/bond returns. Still survived at 4.0% with inflation raises. Later work by Bengen suggested that adding small-cap stocks bumped the historical safe rate toward ~4.5% (Bengen, 1997), but the core headline people quote is 4%.

The Trinity Study (Cooley, Hubbard, Walz, 1998; updated 2011 through 2009) didn’t crown a single number. It calculated success probabilities across mixes and withdrawal rates. For a 30-year retirement with constant-dollar (inflation-adjusted) withdrawals: 4% had ~95% historical success with a 50/50 stock-bond portfolio; go to 75/25 and you were around ~96-98%. Drop to 3% and you were basically near 100%. Push to 5% and success fell to roughly ~70-80% depending on the stock mix (1998 original tables; 2011 update broadly similar). If I’m remembering the exact 50/50 at 5% as ~76%, that’s about right, give or take a few points by horizon.

What this means in plain English: it’s a historical worst-case safeguard, not a promise. It presumes you own a diversified U.S. stock/bond portfolio, you rebalance, you keep costs low (Bengen assumed no fees), and you give yourself an inflation raise each year. That last part is non-negotiable in the original method. Inflation isn’t an add-on; it’s baked in. Start at 4% of your initial balance, then lift the dollar amount by CPI annually, whether markets sing or sulk. It’s math, not a vibe,

What it doesn’t say: it doesn’t guarantee success in every future 30-year stretch, it doesn’t cover taxes, and it doesn’t excuse a 1% fee drag. Fees are deadly here. A 0.70% all-in cost basically turns a 4.0% rule into ~3.3% “net of fees” purchasing power, because the historical tests didn’t subtract your advisory fee or fund expense ratios. Same with sequence risk; if your first five years look like 1969-1974, you’ll feel it. That’s why I keep a sticky note that says: protect the first decade.

Context matters in 2025. Inflation has cooled into the low-3% range this year, and bond yields remain far higher than the zero-rate era, which helps arithmetic but also raises expected bond volatility. None of that rewrites Bengen. It just changes how tightly you stick to the script versus adapting withdrawals with a rules-based guardrail.

Core idea: 4% = initial withdrawal, then annual CPI raises, on a low-cost, rebalanced stock/bond mix. It’s a disciplined starting point, not a guarantee.

• Bengen (1994): 4.0% survived every 30-year period in U.S. data tested; worst case 1966 start.
• Trinity (1998; 2011 update): ~95% success at 4% with 50/50; ~70-80% at 5%; ~~100% at 3% (30-year horizon).
• Assumes: inflation adjustments each year, diversification, rebalancing, low expenses, pre-tax analysis.

So…does 3% inflation change the math? Here’s the straight answer

Short answer: not really. A 3% inflation backdrop is pretty close to the long-run U.S. experience. In the long Ibbotson/SBBI-style series, CPI inflation from 1926-2023 averages right around ~3% per year (call it about 2.9-3.0% depending on geometric vs. arithmetic). That’s the regime the original 4% work implicitly lived in, with the outliers being the 1970s bursts and the 1930s lows.

Let’s make it plain with dollars. Suppose you start with $1,000,000, you take the classic 4% in year one, $40,000, and then you give yourself an inflation raise each year:

• At 3% inflation, year 10’s withdrawal is $40,000 × (1.03)^10 ≈ $53,800.
• By year 20, it’s $40,000 × (1.03)^20 ≈ $72,400.

Those are nominal dollars, but the whole point is you’re preserving roughly the same purchasing power across time. The 4% rule expects that step-up; it was built assuming you inflate the paycheck every year. So 3% by itself doesn’t break anything, the killers, the things that actually bend the plan out of shape, are ugly returns early in retirement (sequence risk), high fees, and taxes that eat the real spend. I’ve said this before in meetings and I’ll repeat it here: a 1% all-in fee drag is like hiking with a 20-pound vest, you can do it, but you notice it on mile 3.

Now, 2025 reality-check. Inflation has cooled into the low-3% range this year, and bond yields are still materially higher than the zero-rate era. That actually makes the math a bit friendlier for balanced portfolios because your “ballast” isn’t yielding 0-1% anymore, though, yes, higher yields also mean bonds can wiggle when rates jump. None of this rewrites the 4% framework, it just argues for being rules-based about adjustments.

Here’s a quick sensitivity run you can hold in your head:

• Inflation at 0%: Same $40,000 every year in nominal terms. That’s a steady real paycheck. All else equal, success odds go up because your withdrawals don’t creep higher.
• Inflation at 3%: The $40,000 grows to ~$53,800 by year 10 and ~$72,400 by year 20. This is the baseline the historical data already assumes.
• Inflation at 5% for a stretch: Year 10 jumps to $40,000 × (1.05)^10 ≈ $65,100; year 20 ≈ $106,000. That’s where you want flexibility, either a temporary spending collar (e.g., cap raises at 2-3% when markets are down) or an asset mix that leans a bit more into equities and short-duration bonds to protect real spending power. Not forever, but for the stretch.

Two mechanical notes that get missed: (1) inflation adjustments happen off last year’s dollar amount, not your original 4%, and (2) real returns are what matter over 30 years, if a 60/40 portfolio earns, say, 6-7% nominal and inflation runs ~3%, you’re in that 3-4% real ballpark where the 4% rule historically held together. If early-year returns are poor, tighten the belt a touch or skip the full CPI raise, these small moves compound in your favor. If early-year returns are good, don’t get cocky, bank the cushion.

Bottom line I keep taped on my monitor: 3% inflation is the default setting the 4% rule was stress-tested in. The plan doesn’t fail because of 3% CPI; it fails when returns arrive in the wrong order, costs are too high, or taxes weren’t modeled. Fix those, and the framework still works.

2025 reality check: yields, real returns, and what actually funds the raises

Here’s what matters right now, not in a textbook: the mix. Positive real yields are back, stock valuations are still rich, and high-quality bond income actually means something again. That combo is way more important than whether CPI lands at 2% or 3%. In 2024, 10-year TIPS yields spent long stretches around ~2% (yes, real, after inflation). That carried into 2025 with on-and-off moves in roughly the 1.7%-2.2% zone. When your “risk-free” real anchor is positive, you don’t need equities to do all the heavy lifting to fund your annual raise. You can literally earn some of the inflation-adjustment from the bond sleeve.

I’ll put some numbers around it because hand-waving isn’t helpful. Cash and short T-bills paid north of 4%-5% for much of 2024-2025, and high-quality core bond yields (think Bloomberg U.S. Aggregate) lived roughly in the ~4.5%-5.5% yield-to-worst range during that span. Investment-grade corporates often printed higher, ~5.5%-6.0% depending on the month and spread wobble. Contrast that with the 2010s when the Agg often yielded 2%-3% and you were basically begging equities to carry the mail. Different world.

Equities still set the ceiling, but valuations set the lane. Shiller’s CAPE ran around ~31 at points in 2024 (year noted), and it hasn’t exactly gotten cheap this year. History is blunt about this: higher starting valuations tend to correlate with lower forward 10-year real returns. Using Robert Shiller’s data, periods with CAPE in the top decile (roughly >30) have shown median 10-year real equity returns around ~2%-3% annualized. Doesn’t mean a crash is imminent, just means the base case for stocks from these levels is more modest.

Now tie it together with the spending problem we actually care about. If TIPS are giving you ~2% real and equities from elevated starting valuations might reasonably produce, say, 3%-4% real over a decade (yes, a range, I know it’s messy), the blended real for a 60/40 could sit in the ~2.5%-3% pocket with less equity reliance than the 2010s. That’s exactly the neighborhood where inflation-linked raises at a 3.5%-4% starting withdrawal have historically held together, provided the first few years don’t punch you in the teeth.

Sequence still rules. The first 5-10 years dominate outcomes. That part didn’t change with rates; it just got a little less unforgiving because bonds actually pay you now.

Why the 2% vs 3% inflation debate is a sideshow: a 1 percentage point difference on CPI matters, sure, but when the risk-free real line moved from negative (2010s) to roughly +2% at times in 2024-2025, that’s the big swing. It directly funds a chunk of your raise. And if you’re holding quality bonds at 4.5%-5.5% nominal and CPI runs ~3%, you’re not hemorrhaging purchasing power like you were when yields were 2% and inflation popped.

• Positive real yields (2024-2025): 10-year TIPS around ~2% in 2024 supported inflation-adjusted withdrawals without relying entirely on stocks.
• Bond income matters again: Core bond and IG corporate yields in the mid-4s to ~6% improve sustainability relative to the 2010s.
• Valuations still bite: With CAPE near/above 30 in 2024, historical 10-year real equity returns have skewed ~2%-3% median.

Bottom line for 2025: with real yields positive, a classic 50/50 or 60/40 can support inflation-linked raises better than it could in the low-rate 2010s. You can fund more of the raise from bonds and let equities be the upside engine, not the oxygen tank. Just don’t forget the annoying part I haven’t mentioned yet, taxes and fees. They’re quiet return killers. And yeah, sequence risk still sets the terms in years 1-10, so if markets stumble early, trim the raise a hair or pause it; if they run hot, bank the win. That’s the boring playbook, and boring is usually what pays the bills.

Taxes, fees, and healthcare: the stealth drain that turns 4% into 3%

Here’s the un-fun part. The math on a “4%” plan looks clean on a whiteboard, then the real-world takes a nibble from three sides: fees, taxes, and healthcare. Each bite is small in isolation, but stack them and you’re quietly living on 3%-ish. I’ve watched this play out with clients for two decades. It’s never one big mistake, it’s the slow drip.

Fees first. If your all-in fee stack (advisor + fund expense ratios + platform) runs 0.50%, that’s basically a 0.50% permanent headwind to what you can safely spend. You don’t “feel” it in a single year, but over time the compounding drag is the same as lowering your safe withdrawal rate by roughly that amount. Simple example: $1,000,000 portfolio, 4% target is $40,000. Add 0.50% in fees ($5,000/year), and you’re effectively spending from a 3.5% pool unless markets bail you out, sometimes they do, sometimes they don’t.

Now taxes, 2025 is a planning year. This is the last year before the Tax Cuts and Jobs Act (TCJA) provisions are scheduled to sunset in 2026. Bracket management matters this year because current brackets and the larger standard deduction are still in place. Harvesting income up to the top of a target bracket in 2025 (Roth conversions, partial IRA distributions) can reduce your lifetime tax on withdrawals if rates rise next year under pre-TCJA rules. And remember the capital gains ladders: the 0% long-term capital gains band was available up to specific thresholds in 2024 (e.g., MFJ up to $94,050; single up to $47,025), and 2025 thresholds are similar by inflation. Using that band for gain harvesting can increase net spend without touching your gross withdrawal rate.

Healthcare is the inflation you didn’t ask for. Medicare premiums behave like an extra CPI line item. The Centers for Medicare & Medicaid Services (CMS) listed the standard Part B premium at $174.70/month in 2024. For a married couple, that’s roughly $4,193 a year before any add-ons. If you trip an IRMAA bracket (income-related monthly adjustment amount), your Part B and Part D costs jump, 2024 IRMAA began at modified AGI over $103,000 (single) / $206,000 (MFJ). IRMAA hits feel like a surtax on success and they’re two-years-lookback, which makes timing conversions and capital gains even trickier. Been there, modeled that, one accidental RMD spillover and you’re paying a higher premium for a full year.

Asset location is the quiet hero. Putting bonds in tax-deferred, equities in taxable, and Roth for high-growth or high-yield assets can lift after-tax spend. Three levers that work right now:

• Roth vs. traditional: In 2025, consider partial Roth conversions up to a chosen bracket ceiling before 2026 sunsets. It’s not glamorous, but future RMDs get smaller and IRMAA risk can drop.
• Capital gains harvesting: Use the 0%/15% bands intelligently, harvest up to the 0% limit when possible, or offset gains with harvested losses to keep AGI controlled.
• QCDs at 70½: Qualified charitable distributions straight from IRAs keep AGI down, reduce RMD impact, and can indirectly curb IRMAA. Yes, the 70½ rule is still a thing, odd age, great tool.

Pull it together with a gut-check example. $1,000,000 at 4% = $40,000 gross. Subtract 0.60% in combined fees ($6,000), you’re at $34,000. Assume blended federal/state tax on withdrawals around 10%-12% (varies wildly), say another ~$3,500. Add Medicare Part B for two at 2024’s rate (~$4,193) and some Part D. Pretty quick, your spendable lands near $26k-$28k. Not exact science, lots of gray here, but the order of operations is the point: control what you can so your 4% doesn’t quietly become 3%.

Working rule for 2025: trim fees, fill brackets (before 2026), watch IRMAA cliffs, and use Roth/QCD/gain-harvest levers. Positive real yields help this year, but the after-tax, after-fee cash flow is the scoreboard.

Make the rule smarter: dynamic guardrails and cash buffers

Make the rule smarter: dynamic guardrails and cash buffers. The classic “4% and inflate it every year” works on paper, but retirees live in the real world, markets zigzag, inflation comes in waves, and bills don’t politely average out. If you’re retiring in 2025, you can keep the spirit of 4% without locking yourself into a rigid autopilot. Here’s the pragmatic upgrade set I’ve used with clients (and frankly, argued about at too many kitchen tables).

Guardrails that nudge, not panic. The Guyton-Klinger framework (2006) set the template: pick a starting withdrawal, then raise or cut by a set percentage when your current withdrawal rate drifts outside bands. A common version: bands at ±20% around your initial rate, with a ±10% adjustment when crossed. Simple example, start at 4.0%; if market losses lift your effective rate above 4.8% (because the portfolio fell), you trim next year’s draw by 10%. If strong markets push it below 3.2%, you give yourself a 10% raise. It’s rules-based, which means fewer sleepless nights and fewer “should we cut now?” debates. The original paper’s language is dry, but the idea is elegant: keep spending tethered to reality, not last year’s CPI print.

Ceiling-and-floor COLA beats blind CPI. Inflation was 3.4% for 2024 on CPI-U (BLS), and through August 2025 headline CPI is running roughly ~3% year-over-year. You could just add that to your paycheck each January. Or, more durable, you can cap raises in rough markets and catch up later. For instance: set a spending raise ceiling of 2% in years when your portfolio ended the year below, say, 25× spending, and allow up to CPI (or CPI+1% up to a 4% cap) when you’re above 30×. If inflation runs at 3.0% but markets were down, you take 2% now and permit a partial catch-up when the portfolio heals. Is it perfect CPI matching? No. But paying the electric bill without anxiety is worth the trade.

Hold a cash/short-duration buffer, then refill in up years. Sequence risk is the silent killer early in retirement. A practical buffer is 1-3 years of core spending in cash or short-duration Treasuries. With front-end yields still decent in 2025-3-12 month Treasuries are hanging in the ~4.9%-5.3% zone lately, your “sleep-at-night” money isn’t dead weight. When equities are up, top the bucket back up. When markets are down, draw from the buffer instead of selling stocks at bad prices. Yes, it can feel silly to hold cash when yields dip; it feels a lot less silly during a 20% drawdown.

Re-test annually with simple ratios. Don’t spreadsheet yourself to death; just mark the lanes:

• Below ~20-25× spending: tighten COLA and follow the guardrail cut if triggered. Consider pausing big discretionary items.
• Between 25-30×: base COLA only (maybe CPI capped at 2%-3%), keep refilling the buffer, no hero moves.
• Above ~30×: you’ve got margin, consider a bump, charitable gifts, or Roth conversions to shape taxes before 2026’s sunset. If a guardrail boost triggers, enjoy it, but don’t overfit one great year.

Okay, but does 3% inflation change the “4% rule”? The research question pops up every year. The short answer: not by itself. The original 4% studies were stress-tested through high and low inflation regimes. What does change the comfort level is the combo: starting valuation, bond yields, and inflation trend. Today you’ve got positive real yields (5-year TIPS recently around ~2.1% real), which is a tailwind we didn’t have in, say, 2021-2022. That helps fixed-income do its job again. If inflation were to re-accelerate above 4% for a stretch, your ceiling-and-floor COLA and guardrails are the pressure valves, use them.

Putting it all together (messy, but workable). Start near 4% if fees are low and you’ve got that 1-3 year buffer. Use ±20% bands, ±10% adjustments. Cap raises at 2% in weak years, allow CPI up to 4% in strong years with partial catch-up. Refill cash when markets smile; spare equities when they don’t. Re-test once a year. I’m 90% sure Guyton’s original example used similar percentages; if I’m misremembering the exact band width, the spirit is the same, pre-commit to rules so you don’t negotiate with yourself when markets are loud. It’s not flashy; it works.

2025 retiree playbook: rules that flex, cash that buffers, and an annual check on your multiple. Markets earn your raises; the plan decides the timing, you just follow it.

Answering the headline and what to tackle next

Answering the headline and what to tackle next. Does 3% inflation change the 4% rule? Not really. The original Bengen (1994) work and the Trinity Study (1998) already assumed you adjust withdrawals for inflation each year, so the mechanism is built in. With headline CPI running roughly ~3% year over year in mid‑2025 (BLS data) and 10‑year TIPS real yields hovering around ~2% this year, the bigger swing factor for a 30‑year plan isn’t the inflation print itself, it’s real yields, fees, taxes, and how markets treat you in your first 5-7 years. I know that sounds unsatisfying. It is. But it’s also the honest answer.

In other words, the 4% rule still works as a baseline if you keep costs low, manage taxes, and stay flexible. On costs: asset‑weighted U.S. fund fees averaged about 0.37% in 2023 (Morningstar, 2024 report). Add advice and trading, and many households creep toward 0.7%-1.0%. That matters because every 1% in all‑in fees tends to shave roughly 0.5-0.7 percentage points off sustainable withdrawal rates in broad simulations (Pfau 2012; updated work 2018). Pair that with 2025’s better starting yields, 10‑year Treasuries around the low‑to‑mid 4s and real yields near 2%, and you’ve got a sturdier bond anchor than we had in 2020-2021. Early‑sequence returns still rule the roost, though; a poor first 3 years can overwhelm tidy averages…

So what’s realistic right now? For many 30‑year plans with balanced portfolios (say 50/50 to 60/40), a flexible 3.5%-4.5% range is more useful than a single number. Start near 4% if your all‑in costs are under ~0.4% and you’ve got a 1-3 year cash buffer. Slide toward 3.5% if fees are closer to 1%, taxes bite, or you’re retiring into a shaky first year. If markets gift you strong early returns, fine, your guardrails will allow raises. If not, you trim. That’s the deal.

• Your 2025 checklist
• Confirm all‑in costs (funds + advice + trading). Target ≤0.4% if possible.
• Set a guardrail policy (±20% bands; ~10% pay changes when bands breach). Pre‑commit to the rules.
• Align asset location with tax brackets, keep bonds/TIPS in tax‑deferred when it fits; harvest capital gains deliberately in 0%/15% years.
• Size your cash buffer (12-36 months). Refill after up years; protect equities when they’re down.

One small caveat, I don’t know your specific tax picture, and the brackets shift again soon. Which brings us to what’s next.

• Roth conversion windows before 2026: With TCJA provisions set to sunset in 2026, 2025 may be your last clean year for lower brackets; fill them with partial conversions.
• Annuity ladders when real yields are positive: SPIA payout rates track rates; with 10‑year TIPS near ~2% in 2025, partial ladders can offload longevity risk without over‑annuities, been there, seen the regret.
• When to claim Social Security: Delaying to 70 reduces portfolio strain; the implied real “return” from delay is still attractive in most cases (SSA tables haven’t changed that part). Timing is a cash‑flow puzzle; we’ll map it.

If you keep your fees lean, taxes smart, and spending rules mechanical, the 4% rule at 3% inflation isn’t broken. It just asks you to be a pro about the boring stuff, which, yeah, isn’t fun; it works.

Frequently Asked Questions

Q: Should I worry about 3% inflation if I’m following the 4% rule?

A: Yes, 3% isn’t “meh,” it’s compound erosion. Headline CPI sits around 3% this year, and at that pace prices roughly double in about 24 years (Rule of 72). If you keep withdrawals flat at $40,000, after 10 years at 3% inflation that buys about $29,800 in today’s dollars. The 4% rule was built on inflation-adjusted withdrawals. Skip the adjustments and you’re giving yourself a slow pay cut.

Q: How do I adjust my withdrawals each year without blowing up my plan?

A: Do three simple things: 1) Start with a reasonable first-year withdrawal (around 4% if you’ve got a balanced portfolio and a 30-year horizon). 2) Each year, increase last year’s dollar withdrawal by actual inflation (CPI-U), not by portfolio size. 3) Add guardrails: pause the inflation raise after a bad year or trim by 5-10% if the withdrawal rate (this year’s dollars ÷ portfolio value) drifts above, say, 5.5%. Keep 1-2 years of withdrawals in cash/short-duration bonds, rebalance annually, and don’t forget taxes and fees, those are real withdrawal drag. It’s boring. It works.

Q: What’s the difference between treating the 4% rule like fixed income versus inflation-adjusted spending?

A: Fixed-income mindset: you pick a dollar amount (say $40k) and stick to it forever. It feels safe, but your purchasing power erodes, fast if inflation runs ~3% like it has this year. Inflation-adjusted spending: you start at 4% in year one, then raise the dollar amount by CPI each year regardless of returns. That preserves lifestyle in real terms. The first approach is a stealth cut; the second defends your standard of living. Big difference in the grocery aisle and with Medicare premiums.

Q: Is it better to keep withdrawals flat during bad markets or stick with the inflation increase, how do I handle sequence-of-returns risk?

A: Sequence risk is the silent budget killer. The order of returns early in retirement matters more than the average. Think of 2022: stocks fell about −18% and core bonds about −13%, a rare double hit. If you keep taking full inflation raises while markets are down, you’re selling more shares at lower prices, which shrinks the future income base. I’d use a rules-based throttle. Here’s a practical setup I’ve used with clients (and yes, on my own spreadsheet):

• Baseline: start at 3.5-4.0% in year one.
• Annual raise: last year’s dollars plus CPI, but cap the raise at, say, 3% and set a floor of 0% (no automatic cuts for routine noise).
• Guardrails: if your current withdrawal rate (this year’s dollars ÷ portfolio value) rises above 5.5%, skip the raise or trim by 5-10% until you’re back in range; if it falls below 3%, allow a catch-up raise.
• Cash bucket: park 12-24 months of withdrawals in cash/short-duration bonds so you’re not forced to sell equities in down years.
• Rebalance: after drawdowns, rebalance from bonds/cash to equities gradually rather than all at once.
• Taxes and fees: plan net of both. A 1% all-in fee plus 0.5-1% tax drag is basically a permanent haircut. This way, you preserve the core of inflation-adjusted spending in normal years, but you purposefully pause or trim in ugly markets. It’s not pretty, but it beats a permanent lifestyle cut later.

@article{does-3-inflation-change-the-4-rule-avoid-this-mistake,
    title   = {Does 3% Inflation Change the 4% Rule? Avoid This Mistake},
    author  = {Beeri Sparks},
    year    = {2025},
    journal = {Bankpointe},
    url     = {https://bankpointe.com/articles/3-inflation-vs-4-rule/}
}