Morningstar’s Retirement Income Research: Reevaluating the 4% Withdrawal Rule
Exploring the different strategies that retirees can use to determine the appropriate withdrawal rates for their portfolios.
How much can you withdraw from your retirement portfolio each year?
For many investors, the go-to answer is 4%.
Researcher Bill Bengen developed that rule of thumb back in 1994, meaning an annual withdrawal rate of 4% is the amount that will see investors through retirement in any economic scenario. (Check out our interview with Bengen to hear how he thinks that rule has held up in today’s market environment.)
In 2021, against a backdrop of historically low bond yields and high equity valuations, we decided to reevaluate Bengen’s seminal work. The key difference is that our research embedded forward-looking return forecasts for the major asset classes, whereas Bengen relied on historical market returns.
Our inaugural research concluded that 3.3% was a more realistic estimate of a safe starting withdrawal rate in 2021—assuming a balanced portfolio, fixed real withdrawals over a 30-year retirement, and a 90% probability of success.
That number has ticked up in the years since. In 2022, we estimated a 3.8% starting withdrawal rate. In 2023, we estimated 4.0%, as the inflation forecast started to moderate and yields on bonds and cash increased.
That said, these are estimates for fixed withdrawal rates, and retirees can also use flexible withdrawal systems to enlarge their starting and lifetime withdrawals.
Our research has explored the potential benefits of the following strategies:
- Don’t fully adjust your withdrawal rate for inflation. For example, only adjust the annual dollar amount of withdrawals to reflect 75% of the actual inflation rate.
- Take withdrawals in line with required minimum distributions. Retirees can use the same framework that underpins RMDs from IRAs: Divide portfolio value by life expectancy to calculate an appropriate withdrawal rate.
- Implement guardrails on your portfolio. That is, take less in down markets and set a limit on how much more you can take during good ones.
- Assume spending declines in line with historical data. In 2023, we began exploring how retirees’ withdrawal rates can incorporate the decline in spending that typically occurs over retirement.
As the markets and economic environment continue to evolve, we expect so will our estimates. Retirement withdrawal rates can be a tough nut to crack, but the right level of flexibility can help set retirees up for success.
For more from our research and how it’s evolved over the years, check out the content below.
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