Here's the New 'Safe' Withdrawal Rate: Morningstar

What You Need to Know

A starting withdrawal rate of 3.8% is “safe” in Morningstar’s model over a 30-year time horizon, meaning it brings a 90% likelihood of not running out of funds.
Dynamic withdrawal strategies may help retirees consume their portfolios more efficiently, factoring in both portfolio performance and spending.
However, dynamic strategies bring their own challenges, including significant swings in annual income.

Investors hoping to utilize a “safe” fixed real withdrawal strategy for managing their retirement income can plan to withdraw 3.8% of their portfolio’s value per year, according to Morningstar’s newly published report, “The State of Retirement Income: 2022.”

In the newly published analysis, the analysts found that a starting withdrawal rate of 3.8% delivers a 90% success rate (defined here as a 90% likelihood of not running out of funds) over a 30-year time horizon. The analysis assumes a balanced portfolio of 50% stocks and 50% bonds.

While lower than the traditional 4% withdrawal assumption commonly cited by media pundits and financial planners, the new figure is appreciably higher than the 2021 figure, which was 3.3% for a balanced portfolio with a 90% projected success rate.

Taking a Page From Market History

As the Morningstar team explains, history demonstrates that the “right” or “safe” withdrawal rate depends on three key variables: the asset allocation of the portfolio; the market environment that prevails over a retiree’s drawdown period; and the length of the drawdown period. Looking at all of the rolling 30-year periods from 1930 through 2019, the safe rate ranges from 3.7% for the worst period to 6% for the best.

In general, according to Morningstar, portfolios that maintained balanced or more equity-heavy asset allocations delivered higher returns and, in turn, higher withdrawals than those with more-conservative positioning.

That said, in less-forgiving environments, such as the one that prevailed in the second half of the 1960s and early 1970s, investors with excess equities stood a high chance of exhausting their portfolios by the end of the retirement period if they made annual withdrawals of even 4%.

Overall, according to the analysis, employing a more aggressive equity allocation does not meaningfully improve safe starting withdrawal rates. In fact, investors with shorter time horizons of 10 to 15 years can actually employ a higher withdrawal rate if they’re using a more conservative portfolio mix relative to an equity-heavy one.

This is the case because their returns are smoother and subject to meaningfully less sequence of returns risk.