The recommended withdrawal rate for retirees from their retirement investment accounts is set to increase in 2023, according to Morningstar. The rate will rise from 3.8% in 2022 to 4% next year. This adjustment takes into account factors such as rising inflation and average life expectancy, which can have a significant impact on retirees’ financial planning.
John Rekenthaler, Vice President of Research at Morningstar, discussed the report with Yahoo Finance Anchor Diane King Hall. Rekenthaler addressed concerns about retirees outliving their savings, stating that the calculations are based on a conservative approach. The 4% withdrawal rate is designed to cover a 30-year time horizon, taking into consideration longer life spans. Even for a 65-year-old retiree, this rate is projected to last until the age of 95.
Rekenthaler also highlighted that in most cases, retirees tend to spend less money as they grow older due to decreased energy levels and fewer activities. Additionally, the simulations conducted by Morningstar aim for a 90% success rate, meaning that there is usually a surplus of funds at the end of the retirement period.
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When asked about the appropriate balance for retirement portfolios, Rekenthaler emphasized that it depends on the desired lifestyle and income needs during retirement. While he suggested aiming for a million-dollar portfolio, he acknowledged that this may be more challenging for lower-wage workers compared to professionals who have contributed to a 401k plan for many years. The goal is to achieve a balance that can provide a consistent purchasing power throughout retirement, in addition to Social Security benefits.
Rekenthaler pointed out that the report focuses on projections for those who have already retired or are retiring soon, rather than past performance. However, he acknowledged that the average balance for retirement accounts is in the six-figure range, which may not be sufficient to cover future living costs.
Overall, the 4% withdrawal rate recommended by Morningstar for 2023 takes into account various factors, aiming to provide retirees with a sustainable income throughout their retirement years.
