The retirement playbook has changed dramatically. After years of scraping by on bonds paying next to nothing, retirees are now looking at a landscape where fixed income actually delivers meaningful returns. The 10-year Treasury yield currently sits around 4.15%, and the Federal Reserve’s December 2025 decision brought the federal funds rate to a 3.5%-3.75% range after three consecutive cuts this year. This environment creates real opportunities for people drawing income from their portfolios.
The famous 4% rule has served as a retirement planning cornerstone for decades. Researcher Bill Bengen developed that guideline back in 1994, suggesting that withdrawing 4% of your portfolio in year one and adjusting for inflation thereafter would see you through any economic scenario. But circumstances have changed since then. Current market valuations, evolving yield curves, and new research suggest the math around withdrawal strategies deserves a fresh look. Your portfolio might generate more natural income today, and the allocation between stocks and bonds that made sense five years ago might need reconsideration.
Understanding Today’s Rate Environment
The current interest rate landscape directly shapes how retirement withdrawals should work. The Federal Reserve cut rates three times in 2025, bringing borrowing costs to their lowest level since 2022. Fed Chair Jerome Powell indicated the central bank is “well positioned to wait and see how the economy evolves,” suggesting rates may stabilize for a while.
Treasury securities now offer yields that haven’t been seen in years. The 10-year Treasury hovers around 4.15%, while the 30-year yield sits near 4.5%. Series I Savings Bonds currently pay a composite rate of 4.03% for bonds issued through April 2026. These yields create income opportunities that simply didn’t exist during the ultra-low rate environment of the previous decade.
This is important because fixed income can now provide substantial portfolio income without requiring aggressive stock allocations. Someone who needed heavy exposure to equities just to generate basic growth and income in 2019 might accomplish similar goals with a more conservative mix today. The trade-off between risk and reward has genuinely changed.
Reconsidering the 4% Rule
The traditional 4% rule suggests withdrawing 4% of your portfolio in the first year of retirement, then adjusting that dollar amount for inflation each subsequent year. Recent research recommends a more conservative starting withdrawal rate of 3.7% for new retirees, and their updated 2026 guidance suggests 3.9% may be appropriate going forward.
Why the Conservative Approach
The recommendation for a lower withdrawal rate stems from several factors working in concert. Stock valuations remain elevated compared to historical averages, which may limit future return potential. Bond yields, while higher than recent years, still sit below some historical norms. The combination suggests portfolios might not grow as robustly as they did during certain periods used in the original 4% rule research.
A 3.7% starting withdrawal rate on a hypothetical $1 million portfolio means beginning with $37,000 in year one, then adjusting that dollar amount for inflation going forward. Morningstar’s researchers tested this against the traditional 4% approach and found compelling results. Retirees who followed the 3.3% recommendation in 2021 would have seen their portfolio balance dip to about $786,000 after 2023 withdrawals and bounce back to $960,000 by the end of 2024. Monte Carlo simulations predict a 91.8% success rate over 30 years for this group, compared with just 72.3% for those who stuck with the traditional 4% rule.
The Upside of Higher Yields
The positive side of the current environment is that bonds and fixed income now generate meaningful income on their own. A bond portfolio yielding 4% to 5% provides income that can cover a substantial portion of withdrawal needs without requiring asset sales. This natural income generation helps reduce sequence of returns risk because you’re less dependent on selling investments during market downturns.
Dynamic Withdrawal Strategies
Fixed withdrawal rates work well for planning purposes, but they may not reflect how people actually want to spend in retirement. Dynamic strategies adjust withdrawals based on portfolio performance, potentially allowing higher spending when markets perform well and requiring spending reductions when portfolios decline.
The Guardrails Approach
The guardrails method sets upper and lower spending limits around your initial withdrawal percentage. When your portfolio performs well and your withdrawal rate drops below the lower guardrail, you can increase spending. When markets decline and your withdrawal rate rises above the upper guardrail, you reduce spending.
Financial planner Jonathan Guyton and professor William Klinger developed this framework, and it aligns with how many people naturally behave. In years when portfolios grow substantially, retirees often feel comfortable spending more. In down years, most people instinctively pull back on discretionary expenses. The guardrails method formalizes this tendency into a systematic strategy. Morningstar’s research found that the guardrails approach offers a starting safe withdrawal rate of 5.2% for a portfolio of 40% equities and 60% bonds, providing significantly more retirement income than static approaches.
Percentage-of-Portfolio Withdrawals
Another dynamic approach involves withdrawing a fixed percentage of your portfolio value each year rather than a fixed dollar amount. If you hypothetically withdraw 4% annually and your portfolio grows to $1.2 million, you withdraw $48,000 that year. If it drops to $900,000, you withdraw $36,000. This method ensures you’ll never run out of money since you’re always withdrawing a percentage of what remains. The downside is that your income fluctuates with market performance, which can make budgeting challenging for people with fixed expenses.
Allocating for Higher Rates
Elevated interest rates have fundamentally altered the risk and reward dynamics of portfolio construction. During the extended period when high-quality bonds yielded approximately 2%, retirees were effectively forced to overweight equities to generate sufficient returns. Today, with Treasury yields hovering around 4%, investors can potentially secure comparable financial outcomes with a more defensive asset mix.
Reconsidering Stock-Bond Ratios
Traditional guidance often suggested that retirees hold their age in bonds. A 65-year-old might hold 65% bonds and 35% stocks under this framework. During the low-rate environment, many retirees shifted toward higher stock allocations because bonds provided insufficient income and growth potential.
With bonds now generating meaningful yields, returning to more conservative allocations may make sense for some retirees. A 50-50 or 60-40 stocks-to-bonds split provides more stability and income than it did five years ago. According to research, investors at age 60-69 might consider a moderate portfolio with 60% stocks and 35% bonds, while those 70-79 could shift to 40% stocks and 50% bonds. The appropriate allocation depends on your income needs, risk tolerance, and other income sources like Social Security or pensions.
Bond Ladder Strategies
Bond laddering involves buying bonds with staggered maturity dates. You might hold bonds maturing in one year, two years, three years, and so on. As each bond matures, you reinvest the proceeds into new bonds at the long end of your ladder.
This strategy works particularly well in a higher-rate environment. You can lock in current rates across different maturities while maintaining liquidity as bonds mature regularly. The steady stream of maturing bonds provides cash for living expenses without requiring sales at inopportune times. Study finds that if you have several hundred thousand dollars to invest, you may be able to construct a portfolio of high-quality, low-risk bonds with reliable yields higher than many other fixed income or short-term cash investments.
Managing Sequence of Returns Risk
Sequence of returns risk refers to the danger of experiencing poor market returns early in retirement. When you’re withdrawing money while the portfolio is declining, you lock in losses and reduce the portfolio’s ability to recover when markets eventually improve. Reports suggest that your first five years of retirement represent the “danger zone” for tapping accounts during a downturn.
Bucket Strategies
The bucket approach divides your portfolio into different time horizons. Your first bucket holds one to two years of expenses in cash or very short-term bonds. Your second bucket holds three to ten years of expenses in intermediate-term bonds and conservative investments. Your third bucket holds longer-term money in stocks and growth assets.
You spend from the first bucket, which provides stability regardless of what stocks are doing. As the first bucket depletes, you refill it from the second bucket during stable or up markets. The third bucket grows over time without the pressure of near-term withdrawals. Higher rates make bucket strategies more effective because the intermediate bucket can now generate meaningful returns while maintaining reasonable stability.
Creating Income Floors
Another approach involves creating an income floor from guaranteed sources, then taking variable withdrawals from your portfolio. Social Security provides a base. You might add immediate annuities or bond ladders to create additional guaranteed income covering essential expenses.
Once basic needs are covered by guaranteed sources, you can take a more flexible approach with portfolio withdrawals. This structure allows you to reduce or skip portfolio withdrawals during market downturns because your essentials are covered regardless. Research suggests that enlarging guaranteed income through sources like delayed Social Security filing should precede decisions about portfolio withdrawal rates.
Tax-Efficient Withdrawal Sequencing
Higher interest rates affect the tax efficiency of different account types. Interest income from bonds is taxed as ordinary income, while qualified dividends and long-term capital gains face lower tax rates. This difference matters significantly when deciding which accounts to tap first.
Traditional Account Withdrawals
Withdrawals from traditional IRAs and 401(k)s are taxed as ordinary income. With bonds now generating substantial interest income, the tax treatment of traditional account withdrawals remains the same, but the amount of income those bonds generate has increased. If you’re drawing substantial income from bonds held in traditional retirement accounts, you’re paying ordinary income tax rates on that interest. Strategic Roth conversions during lower-income years might help reduce future tax burden on this bond income.
Taxable Account Advantages
Bonds held in taxable accounts generate interest taxed at ordinary rates, but you also have flexibility with stock holdings. Long-term capital gains on stocks in taxable accounts face preferential rates of 0%, 15%, or 20%, depending on your income. For 2025, single filers won’t pay any tax on long-term capital gains if their total taxable income is $48,350 or less. Married couples filing jointly can have up to $96,700 in taxable income before long-term gains are taxed. Tax-loss harvesting opportunities exist in taxable accounts that you can’t access in retirement accounts.
In a higher-rate environment where bonds generate more income, the tax location of those bonds matters more. Holding bonds in tax-deferred accounts and stocks in taxable accounts often provides better overall tax efficiency. This placement allows your bond interest to grow tax-deferred while keeping stocks in accounts where you can benefit from preferential capital gains rates.
Work With Us
The shift to a higher interest rate environment creates real opportunities to reassess your retirement withdrawal strategy. Bonds and fixed income now generate yields that can support a larger portion of your spending needs, possibly allowing for more conservative allocations while maintaining similar income levels. Dynamic withdrawal approaches like the guardrails method might provide both higher spending and greater portfolio longevity compared to rigid percentage rules. The bucket strategy offers protection against sequence of returns risk, while strategic tax planning can keep more money in your pocket.
At Brogan Financial, we help retirees develop withdrawal strategies that adapt to changing market conditions and align with their specific situations. Whether you’re just entering retirement or already drawing income from your portfolio, we can help you evaluate how current interest rates affect your strategy and what adjustments might strengthen your financial position. Contact us today to discuss how we can help you optimize your retirement income approach in this evolving environment.
