'Safe' Retirement Spending Rate Rises in 2023: Morningstar

“The results vary widely, though,” she warns.

Portfolios with 100% equity weightings delivered the highest starting safe withdrawal percentage over any 30-year period in history, at 6.9%. But in less-forgiving environments, even a 2% starting withdrawal rate could have been dangerous.

Fixed vs. Dynamic Withdrawal Strategies

As the report details, the consideration of dynamic withdrawal strategies may help retirees consume their portfolios more efficiently, factoring in both portfolio performance and spending. However, they also add variability to cash flows, which not all retirees will find acceptable.

“Variable strategies do entail trade-offs — specifically, the tension between a higher lifetime withdrawal rate afforded by periodic withdrawal adjustments and the volatility those adjustments create in the retiree’s cash flows, which may also subject retirees to swings in their standards of living,” the report explains.

Consequently, some retirees may find flexible schemes unacceptable. For example, taking a fixed percentage withdrawal — such as 4% of the portfolio balance per year — essentially solves the problem of running out of money but does so at the expense of the retiree’s standard of living being buffeted by changes in portfolio value.

“Also, should the markets perform particularly badly, the withdrawal amount could end up being trivially low,” Benz warns.

At the opposite extreme, the fixed real withdrawal system that serves as the paper’s base case “nicely addresses a retiree’s desire to have stable portfolio cash flows,” Benz says, much like a paycheck in retirement.

“But taking fixed real withdrawals can be inefficient because it does not link consumption to portfolio values,” the report continues. “If the starting withdrawal is too low and the portfolio outperforms expectations, the retiree will leave behind a large sum, which may not be a goal. If, on the other hand, the initial withdrawal is too high, the retiree will consume too much too early and risk running out prematurely or having to engage in dramatic belt-tightening later in life.”

The full paper offers an in-depth examination of four dynamic withdrawal strategies, showing how each comes along with both attractive and potentially concerning features that will need to be weighed by each individual retiree.

Big Conclusions

Ultimately, the paper finds the guardrails system — which uses flexible withdrawals with upper and lower limits that prevent withdrawals from being either too high or too low in any given year — does the best job of enlarging payouts in a safe and livable way.

For those seeking a simpler approach that provides more predictable withdrawal amounts, however, a fixed real withdrawal system that forgoes inflation adjustments after a losing year moderately increases lifetime withdrawals, without greatly increasing cash flow volatility.

“It is also straightforward to implement,” Benz points out.

Alternatively, retirees who believe that their spending needs will not keep up with inflation over their drawdown period — an assumption borne out by the data on how retirees actually spend — might consider making slight reductions to their annual spending over time.

Pictured: Christine Benz