PLANSPONSOR - December 2022-February 2023 - 8

UPFRONT
A New, Increased 'Safe' Withdrawal Rate?
MORNINGSTAR'S annual model of
how much a retiree with a balanced portfolio
should withdraw over a 30-year time
horizon increased to a starting point of
3.8% on the back of higher bond yields
and lower equity valuations.
The investment data and insights
provider said the return outlooks were
appreciably higher than last year when
the firm recommended a " safe " withdrawal
rate of 3.3%. That rate made waves
at the time because it went against the
industry standard of a 4% withdrawal
rate for a retirement portfolio balanced
roughly 50-50 between stocks and bonds.
At the time, stock valuations were high
and interest rates low.
This year's recommended rate was
created in a very different environment,
due to changing stock values, bond
yields and the impact of inflation, says
Christine Benz, Morningstar's director
of personal finance.
" Interest rates are a big component, "
Benz says. " Your yield as a bond investor
is such a big component of your return
likelihood that your withdrawal rate jumps
significantly for fixed income. "
Being able to withdraw more,
however, is of course less helpful when the
value of one's pool of savings has dropped.
With retirement plan portfolios down as
much as 23% this year for many workplaceplan
savers, the thought of having more to
withdraw may be cold comfort, Benz says.
" It's the amount that really matters, and
a higher withdrawal rate may not deliver
enough cash flow for some. "
Success, for Now
Morningstar's report, " The State of
Retirement Income 2022, " in which
the model appears, gives savers with a
balanced portfolio a 90% probability of
success withdrawing about 3.8% of their
savings. The modelling assumes that
inflation-while potentially elevated into
next year-will average about 2.8% over
the next 30 years, Benz says.
The good news for many retirees is
that, even if inflation stays elevated, they
tend to have fewer everyday costs, Benz
8 PLANSPONSOR.COM December 2022 - February 2023 Art by Irene Servillo
says. Many retirees own their homes,
have cut back on driving and could even
be seeing some relief on medical costs.
According to a separate study, by Bank
of America, 70% of homeowners ages 45
to 76 said they plan to or have retired in
the home they already own. Among those
intending to follow this course, 78% said
they saw no reason to move, while 22%
said they have put so much work into their
home, they want to stay there.
Morningstar also considered findings
that retirees tend to spend the most at the
start of retirement and reduce spending
as they age. That information can help
them determine whether they can take out
more early on, with plans to taper off as
time passes, Benz says. Meanwhile, once
they reach their 80s, if they have enough
assets, she says, there is " no reason " not to
take out more than 3.8%.
Balance Is Best
No matter how much planning takes place,
as 2022 showed, things can change quickly,
both in the short term and for longer-term
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