Morningstar has risen its safe withdrawal rate to 3.8%, a stark increase from last year’s 3.3%, according to its latest annual model.
While the move might be head-scratching for investors worried about the current market environment and high inflation, Morningstar credits positive performances in cash and bond yields for the higher withdrawal rate.
“Because equity valuations have declined and cash and bond yields have increased, the forward-looking prospects for portfolios—and in turn the amounts that new retirees can safely withdraw from those portfolios over a 30-year horizon—have enjoyed a nice lift since we explored the topic last year,” said Christine Benz, Morningstar’s director of personal finance, in a Morningstar report, “The State of Retirement Income 2022.”
As in their 2021 study, Morningstar analyzed rates using a conservative base portfolio of 50% stock/50% bonds for new retirees with a 30-year retirement horizon and a 90% probability of success, finding that as stocks and bonds improve next year, so will the safe withdrawal rate.
According to Morningstar Investment Management, the 30-year outlook for various stock categories ranged from 9% to 12% in this year’s research. Expected bond returns rose from 3% to 5%, and of course, inflation expectation jumped from 2.2% in 2021 to 2.8% in 2022.
While the financial industry’s personal rule of thumb has always been a 4% withdrawal rate, Morningstar notes that retirees can take more funds out of their account—as long as they are willing to accept trade-offs such as fluctuating year-to-year real cash flows and the possibility of fewer leftover assets.
But while the safe retirement withdrawal percentage has increased, don’t expect too much of a rise in your earnings, warns Morningstar in its paper. Investors and retirees must also factor inflation and declined portfolio values, which can eat away at savings.
Morningstar added that applying a more aggressive equity allocation does not necessarily improve safe starting withdrawal rates but said retirees can reduce their equity exposure to 30% and still withdraw 3.8% from their retirement accounts.
This shifts for retirees with a shorter retirement timeline of 10 to 15 years, as Morningstar said they could employ a higher withdrawal rate if using a conservative portfolio mix, rather than an equity-heavy one.
“The reason is that not only have bond-return expectations improved markedly thanks to higher yields, but bond returns are much less variable than equity returns,” said Benz.
Even then, the Morningstar report explains that most retiree spending isn’t linear nor consistent. Retirees are more likely to spend more in their earliest days of retirement—even when considering inflation—and dial back as they reach their 70s and 80s. Reducing cost-of-living adjustments during these periods can increase their safe withdrawal rate even past the 4% rule, jumping to “4.3% for a balanced portfolio over a 30-year time horizon with a 90% success rate,” said Benz.
SEE ALSO:
- 3.3% Safe Withdrawal Rate is the New 4%: Morningstar
- Wade Pfau on ‘Sequence of Inflation Risk’, the 4% Retirement Withdrawal Controversy, and More
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.
