Morningstar - Q1 2022 - 36

Spotlight: Withdrawal Rates
gStarting safe withdrawal rate.
gAverage lifetime portfolio withdrawal rate.
gYear 30 cash flow standard deviation.
gAverage ending value at year 30.
projections calculated by Morningstar
Investment Management.
We employed a 50% equity/50% bond portfolio
as the baseline, but also looked at other
asset allocations, and used the 30-year asset-class
EXHIBIT 1
Starting Safe Withdrawal Rate The required minimum distribution and guardrails
methods allow retirees to withdraw the highest initial amount from their savings
across equity allocations.
Fixed Real
10% Reduction
Forgo Inflation
Guardrails
Starting Safe
Required Minimum Distribution
Withdrawal Rate
5%
Fixed Real
10% Reduction
Forgo Inflation
Guardrails
Required Minimum Distribution
Outside of the required minimum distribution method,
starting safe withdrawal rates are highest in balanced
allocations and lowest in less-diversified allocations.
100%
Equity Allocation
90
80
70
Source: Morningstar Direct. Data as of 12/31/2020.
60
50
Outside of the required minimum distribution method,
starting safe withdrawal rates are highest in balanced
allocations and lowest in less-diversified allocations.
100%
Equity Allocation
90
EXHIBIT 2
Fixed Real
Average Lifetime Withdrawal Rate The required minimum distribution and guardrails
methods have higher average lifetime withdrawal rates than the other methods.
80
10% Reduction
Forgo Inflation
Guardrails
70
Required Minimum Distribution
Fixed Real
10% Reduction
Forgo Inflation
Guardrails
Equity-heavy allocations under the RMD and
guardrails methods supported higher lifetime
withdrawal rates than bond-heavy allocations.
Required Minimum Distribution
Why? Because the portfolios with higher equity allocations
provided larger " raises " in annual withdrawals after good
years, thereby enlarging lifetime withdrawal amounts.
100%
Equity Allocation
90
80
70
60
50
40
30
Why? Because the portfolios with higher equity allocations
provided larger " raises " in annual withdrawals after good
years, thereby enlarging lifetime withdrawal amounts.
100%
Equity Allocation
90
Fixed Real
10% Reduction
80
Forgo Inflation
Guardrails
70
Source: Morningstar Direct. Data as of 12/31/2020.
36 Fixed Real
Morningstar Q1 2022
10% Reduction
Forgo Inflation
Guardrails
With little year-to-year spending changes, the forgo-inflation
and 10%-reduction methods might be more useful to those
retirees who prize stability and predictability.
Required Minimum Distribution
60
50
40
30
20
Required Minimum Distribution
10
Standard Deviation
120%
90
Standard Deviation
Equity-heavy allocations under the RMD and
guardrails methods supported higher lifetime
withdrawal rates than bond-heavy allocations.
20
10
60
50
40
30
20
10
40
30
20
10
4
3
2
1
Starting Safe
Withdrawal Rate
5%
4
3
2
1
0 Starting Safe
Withdrawal Rate
8%
6
4
2
Starting Safe
Withdrawal Rate
8%
6
4
2
Comparing the Methods: Big Picture
Each method entails its own set of trade-offs. Here,
we offer big-picture observations for each
method through the lens of each of the four
metrics we analyzed.
Starting Safe Withdrawal Rate
Each flexible spending method supported a higher
initial safe withdrawal rate than the fixed real
withdrawal method ( EXHIBIT 1 ). But the required
minimum distribution, or RMD, and guardrails
methods supported the highest starting safe
withdrawal rates. This reflects the nature of these
approaches, which can support higher initial
withdrawals by making year-to-year adjustments
to dollar withdrawals, including throttling
spending at inopportune times.
Average Lifetime Withdrawal Rate
Each flexible spending approach also boasted
a higher average lifetime withdrawal rate
than the fixed real withdrawal method across the
asset-allocation range (EXHIBIT 2 ). The RMD
and guardrails methods supported the highest
withdrawal rates by this measure, while the
forgo-inflation and 10%-reduction methods
offered scarcely more income than the baseline
fixed real withdrawal approach did.
Year 30 Cash Flow Standard Deviation
It is here that we can see some of the trade-offs
that flexible spending approaches like the
RMD and guardrails methods impose, especially
compared with the baseline fixed real
withdrawal method (EXHIBIT 3 ). Namely, there
is much more year-to-year variability in
the dollar value of withdrawals under these
methods; this is the natural byproduct of their
rules, which can dictate higher or lower
spending under certain circumstances. Thus, a
retiree enticed by these methods' potentially
higher starting and lifetime withdrawal
rates must also reckon with the uncertainty they
can involve, including the need to significantly
adjust year-to-year spending.
Average Ending Value at Year 30
Among the flexible withdrawal methods, the
forgo-inflation and 10%-reduction methods
yielded the highest average ending values at the
end of the 30-year retirement horizon in
our analysis, far exceeding those of the required
minimum distribution and guardrails methods,
though more or less in line with the baseline
fixed real withdrawal method's (EXHIBIT 4 ).
The RMD method is designed to spend ratably
based on life expectancy, meaning that it
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