While Morningstar has previously advocated for the “4% Rule,”—a strategy that recommends the starting withdrawal rate for retirement over a 30-year time horizon—the firm’s latest research is now scaling back on the suggested rate.
According to Morningstar’s 2024 State of Retirement Income report, new retirees should forego withdrawing above 3.7% for a balanced portfolio with a 90% success rate, down from 4% in 2023. Morningstar credits higher equity valuations and lower fixed income yields for the decrease.
The report, authored by researchers Amy C. Arnott, Christine Benz, Jason Kephart, and Tao Guo, notes that retirees who want to maximize lifetime spending in retirement should consider alternative options, like flexible portfolio-spending systems. “As in previous years’ research, we found that such strategies help enlarge lifetime spending relative to static spending systems,” writes Benz and Guo in an article detailing the findings.
The researchers list delaying Social Security, implementing Treasury Inflation-Protected Securities (TIPS), purchasing an annuity, and seeking out stable sources of in-retirement cash flows as ways to grow lifetime income. For example, retirees who build a laddered portfolio of TIPS to mature over 30 years could apply a 4.4% withdrawal rate with a 100% probability of success. However, Benz and Guo note that savings would completely deplete by year 30.
Morningstar’s report notes that while the 3.7% withdrawal rate might seem dismal, researchers undertook conservative assumptions in their calculations. “Our return expectations are lower than historical market returns, and we also assume a retiree is seeking a 90% probability of not running out of funds over a 30-year period,” researchers said. “Most importantly, we assume that a retiree will hold real spending constant over the whole 30 years instead of making adjustments along the way.”
If a retiree is willing to adjust their spending in line with portfolio performance, this would allow for greater starting withdrawals and higher lifetime withdrawals, Morningstar researchers add.
Spending/ending ratio
Morningstar’s research highlights a new metric—called the spending/ending ratio—to help retirees consider lifetime spending while keeping in mind future bequests or inheritances.
To this end, the researchers spotlight guaranteed income as a possible way for retirees to secure cash flow in retirement. Retirees who include Social Security and other forms of guaranteed income, along with a 40% equity and 60% fixed-income portfolio, could raise the amount of their lifetime spending, Morningstar reports. Yet, Morningstar clarifies that the strategy could be a better fit for retirees who prioritize lifetime spending rather than leaving behind an inheritance.
“For retirees who prefer maximizing lifetime spending over leaving behind large bequests, these strategies may be more appealing,” Benz and Guo explain. “But retirees who don’t live the full 30 years that we modeled in our study won’t benefit as much from guaranteed income.”
SEE ALSO:
Finke, Toland, Introduce Retirement Withdrawal Alternative to 4% Rule
The ‘4% Rule’ is Back: Morningstar
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
