On April 25 Morningstar published an article “Retirees: Here’s How to Tweak the 4% Rule to Protect Your Nest Egg”. It includes a link to their Report “State of Retirement Income 2024”. The report requires an email address.
With recent stock gyrations I thought that their most recent look at withdrawals and retirement accounts might be helpful.
Here are a few points made in the article:
- “Morningstar researchers have investigated and identified their latest starting safe withdrawal rate. Here’s a hint: it’s slightly lower than the previous year. “
- About saving for retirement, “it’s pretty straightforward as long as you start early and you’re consistent about it. But when it comes to taking your retirement portfolio and figuring out how to turn that into a paycheck for yourself, that gets much more complicated.”
- There’s sort of a balance. You want to make sure that you’re spending enough so that you can enjoy your retirement and enjoy hobbies and travel, that kind of thing, but not spend too aggressively so that you might have to cut back later in life. “A lot of people actually end up underspending.”
- Morningstar states that their approach is different. “We decided that instead of looking at past data, we would do something more forward-looking, using market estimates for possible future returns.”
- Looking at the past 15 years Morningstar says the market returns were “actually the best 15-year period for stocks that we’ve seen going back to 1970.”
- Morningstar has reduced their return assumptions for stocks and bonds.
- Morningstar’s analysis looks at 900 outcomes using a base case of 3.7% and “various flexible or dynamic withdrawal strategies.” These alternatives “can often lift the starting withdrawal rate.”
Here’s a link to the article:
https://www.morningstar.com/retirement/retirees-heres-how-tweak-4-rule-protect-your-nest-egg
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I think the simplicity of the 4% rule (or whatever more conservative variant an individual may choose) is the real value of it.
It’s there to help an individual understand the risk of outliving their saving pot or conversely provide a guide to what an individual can realistically expect to draw from a given “Pot”. It’s not there to weight in all sorts of additional ambitions like legacies or provide completeness of cover for escalating care costs at unknown future ages.
You can of course model for all such things but the only guarantee is that your model will be wrong given you’ll be forecasting uncertain future events.
I think the 4% rule is better for planning for retirement than it is for executing retirement. I use it to scope out if I will have enough money to retire, and how long that retirement will last before I run out of money. Once I get to actual retirement I won’t follow it. I will have fluctuating retirement income (when do I start the pension? When do I start SS? When does my wife start SS? etc) and the amount I draw down will change based on all those factors, as well as the changing needs for expenses.
But it is a handy rule of thumb.
The four (or any other percent) rule is a static approach that also ignores many things. First, it does not consider the changes in consumption pattern over the two / three decades of retired life. Moreover, it also fails to account for unfortunate outflows such as LTC and does not easily accommodate a desire to leave a legacy. Finally, it is silent on the tax impacts of alternate accounts for the withdrawal. Thus, I agree with the comments that the 4% provides a reasonable starting point that needs to be adjusted to take into account other economically and psychologically significant factors.
This is an analysis that gets you thinking but it’d be more complete if they also analyzed based on historical returns. If you assume a standard 30-year retirement timeline, there have been 125 possible 30-year periods since 1871. How many timelines out of 125 would 4% withdrawals (plus inflation adjustments) fail? You can be assured there have been many timelines of the past in which stocks seemed overvalued, but 4% prevailed. This type of analysis is highly useful to understand, to compare and contrast with “forward looking” analyses like the one from Morningstar.
Hi Johathan. I’m one of those who didn’t start at 4% with automatic adjustments each year thereafter. I begin with RMD requirements each year and work from there. I find the underlying data in the report to be fascinating. Most of what I read is backward looking, but Morningstar does forward looking projections. These are more useful to me than looking in the rear view mirror. But no one can predict the future. Their forward projections include inflation, returns for various stock classes and the role of annuities and social security in a withdrawal strategy. Their capital market (equity) projections support the benefit having a diversified portfolio. I’ll be interested in next year’s report, which will be released at the end of 2025. It will include any financial disruptions of 2024.
Thanks for the helpful summary. I think the 4% rule is a useful guideline. Still, I’ve heard of very few investors who follow the rule exactly — withdrawing 4% of their portfolio in the first year of retirement and thereafter robotically stepping up the sum withdrawn each year with inflation. Indeed, faced with the economic uncertainty of a year like 2025, I suspect many retirees instinctively tighten their belts — and I think that’s a good instinct.
I still say your 5% rule is the way to go and people do like simplicity. Whatever the investment account is that you withdraw from is on January 1st of any given year, you withdraw 5% for that year. If the next year is down with corrections 20%, then so be it. Your withdrawals will be lower so you make the adjustments and move on. I like it and more than that, it is working well.