A new recommendation from Morningstar Inc. suggests that retirees can safely withdraw 4% of their retirement savings annually over the next three decades without depleting their funds. This is the highest safe withdrawal percentage since Morningstar began conducting this research. The new withdrawal rate is based on a conservative retirement savings portfolio consisting of 20% to 40% in stocks, 10% in cash, and the remaining balance in bonds, with a 30-year time horizon.
The increase in the withdrawal rate is attributed to higher bond yields, which make it easier for retirees. Morningstar’s personal finance director and co-author of the research, Christine Benz, explained that portfolios with a higher percentage of equity will result in a lower safe withdrawal rate. For example, if 70% of the portfolio is invested in stocks, the safe withdrawal rate decreases to 3.8%.
The research takes into account anticipated returns for stocks and fixed-income investments, as well as long-term inflation forecasts. The study found that higher bond yields and a more moderate inflation outlook contribute to the increased safe withdrawal rate. However, it is important to note that longevity risk, or the risk of outliving one’s savings, should also be considered when determining retirement spending.
Financial advisors caution that the 4% withdrawal rate may be too high for some retirees, as there are various risks to consider, such as market volatility and high inflation rates. They recommend that only one-third of retirement money comes from withdrawals from investment portfolios, with the remaining two-thirds coming from lifetime income sources like Social Security, pensions, and annuities.
It is crucial for retirees to plan their finances carefully, especially considering the rising costs of long-term care. A recent report highlighted the long-term care crisis in the US, with many boomers facing the possibility of depleting their savings due to the increasing cost of care. Planning for these expenses is essential, as most adults do not have funds set aside for future living assistance expenses.
Ultimately, determining the appropriate withdrawal rate for retirement accounts is a personalized decision based on individual circumstances. The 4% rule has been a longstanding guideline for retirees, but it is important to consult with financial advisors to create a plan that aligns with specific needs and goals.
