Morningstar - Q1 2024 - 33

Digging Into the Research: An Analysis of Safe Withdrawal Rates
As we did in 2022's retirement income study, we
employed a base case to test safe starting
withdrawal rates in 2023.
Specifically, we assumed a new retiree with a
30-year anticipated time horizon who would
like to secure a 90% probability of not outliving
their money. We assumed that the retiree was
using a fixed real withdrawal system, which
involves setting the starting withdrawal amount
and then taking inflation adjustments to that
dollar amount each year thereafter, as opposed
to a flexible system discussed earlier.
We held these key inputs steady from 2022,
but the overall assumptions for portfolio
returns rose based on the capital markets
assumptions put together by our colleagues in
Morningstar Investment Management.
The anticipated 30-year returns for stocks were
slightly lower in 2023's research compared
with the previous year, with projected returns for
an all-equity portfolio edging down to 9.41% from
9.88% in 2022. At the same time, though,
expected fixed-income returns (including cash)
moved up to 4.81% from 4.44% in 2022. More
temperate inflation assumptions were another
positive. Our 30-year inflation forecast eased down
to 2.42% from 2.84% in 2022.
With two out of the three main assumptions
trending in a positive direction, our
research suggests that people heading into
retirement today can reasonably use a higher
starting withdrawal rate than indicated
in 2022.
As shown in the exhibit below, we estimate
that a new retiree planning for a 30-year
horizon can safely withdraw as much as 4% of
the portfolio's value as a starting withdrawal
rate for a portfolio with a 40% equity weighting.
Because of the more attractive yields
available on fixed-income securities, we found
the same figure applies to portfolios with
equity weightings as low as 20%.
Investors might expect that safe withdrawal
rates would increase with higher equity
weightings, but that's not necessarily the case.
Our return assumptions still expect that
stocks will deliver significantly better long-term
returns than bonds and cash.
As a result, equity-heavy portfolios typically
ended up with more money left over at the end of
the 30-year period. But stocks also court
significantly higher levels of volatility, which makes
the outcomes for all of the withdrawal rates
tested inherently less certain.
In addition, we targeted a success rate of 90%,
which is relatively high. This also tended to
tilt the scales in favor of the less volatile assets
of bonds and cash.
For retirees with time horizons both shorter
and longer than 30 years, portfolios with
equity weightings of 20% to 40% also generally
supported higher withdrawal rates than more
equity-heavy portfolios.
As shown in the exhibit, retirees with shorter time
horizons can safely withdraw significantly
more than the 30-year baseline assumption, but
safe withdrawal rates ratcheted down at
a more modest pace for retirees with longer
time horizons.
Projected Starting Safe Withdrawal Rate %, by Asset Allocation and Time Horizon (90% Success Rate)
Equity Weighting (%)
100
90
80
70
60
50
40
30
20
10
Portfolios with equity weightings
of 20% to 40% supported
higher withdrawal rates than
more equity-heavy portfolios.
10 Years
8.3
8.6
8.9
9.2
9.4
9.6
9.8
9.9
10.0
9.9
9.7
Source: Morningstar. Data as of Sept. 30, 2023.
15 Years
5.8
6.0
6.2
6.4
6.5
6.7
6.8
6.9
6.9
6.9
6.7
20 Years
4.6
4.7
4.8
5.1
5.2
5.4
5.4
5.5
5.5
5.4
4.2
25 Years
3.8
4.0
4.1
4.3
4.4
4.5
4.5
4.6
4.5
4.4
4.3
30 Years
3.3
3.5
3.7
3.8
3.9
3.9
4.0
4.0
4.0
3.9
3.6
35 Years
3.1
3.2
3.3
3.5
3.5
3.6
3.6
3.6
3.6
3.4
3.2
40 Years
2.9
3.0
3.2
3.2
3.3
3.4
3.4
3.4
3.3
3.2
2.9
33

Morningstar - Q1 2024

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