Safe Withdrawal Rate Edges Up: Morningstar

Its safe withdrawal rate is the highest in two years and adds to the controversy of what withdrawal rate is best.

By Rethinking65

New research from Morningstar suggests that a starting withdrawal rate of 4% is safe for a balanced portfolio.

The company released research on Nov. 13 that shows 4% is the highest available starting safe withdrawal rate in its model and that came from portfolios with modest equity weightings of between 20% and 40%. That withdrawal rate is up from 3.8% in 2022, and that’s primarily because of higher fixed-income yields and lower long-term inflation estimates.

Meanwhile, some observers, Michael Kitces for one, believe a 4% withdrawal rate may not be optimal.

Morningstar said the model’s “base case” is conservatively generated. “For one thing, its equity-return assumptions, especially for U.S. growth stocks, are below their historical averages (reflecting the fact that valuations are high by historical standards). For another, it targets a success rate of 90%. The steeper the success rate, the more that the recommendation will favor the less-volatile assets of bonds and cash,” the report said.

Conservative portfolios modestly improve the starting safe withdrawal rates, Morningstar said, but they do so at the cost of potential future wealth. “Portfolios with equity weights between 20% and 40% supported the highest starting safe withdrawal percentage, but they also recorded lower median balances at Year 30 than did portfolios with more equity exposure,” the report noted.

A retiree who is willing to be more flexible in their spending could have a higher equity allocation that provides higher expected returns over time, the report said.

Morningstar said another approach for achieving a higher withdrawal rate than the base case of 4.0% is to build a ladder of Treasury inflation-protected securities, or TIPS. Such a portfolio could provide a 4.6% withdrawal rate, with a 100% probability of success today. “However, using that strategy also liquidates the portfolio by Year 30, under all conditions,” Morningstar said.

Based on studies of actual spending during retirement, the company said, “retirees often decrease their inflation-adjusted spending over time, a pattern that can also lead to considerably higher safe withdrawal rates.”

To read the report, click here.

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