Traditional guidance says not to spend more than 4% of your retirement savings in the first year to protect yourself from running out of money in your golden years.
A new recommendation puts that figure at 3.8% with a 30-year time horizon, according to researchers at Morningstar Inc., a half-point higher than the 3.3% withdrawal they recommended in 2022 due to expectations for lower future investment returns.
That means if you retire this year with a $640,000 portfolio invested 50% in stocks and 50% in bonds, you should take out no more than $24,320 in 2023.
Still, there are ways to boost that withdrawal rate — from tweaking allocations to not adjusting for inflation — without creating too big of a risk of outliving your savings, according to experts.
“We don’t use any hard-and-fast rules with our clients,” Laura LaTourette, a certified financial planner with Family Wealth Management Group in Dahlonega, Ga., told Yahoo Money. “Since retirement actually has a lot of variables we look at each year as it comes. The most important thing is to make sure clients have enough cash set aside in savings accounts – not in the market – to weather through tough market years and focus on the things we can control.”
‘90% success rate’
Morningstar’s report released this month assumes “a 90% success rate (defined here as a 90% likelihood of not running out of funds) and a balanced portfolio,” according to the researchers, with retirees edging up their withdrawal rate following the initial year to keep up with inflation.
Some caveats: The recommended withdrawal rate for new retirees is calculated by Morningstar swings annually depending on myriad computer-generated simulations of future market returns. And these assumptions are conservative. Most retirees have a shorter time horizon than 30 years, according to the analysis. In addition, their spending may not need to fully keep pace with inflation.
But it’s a good starting place, especially for worry warts.
“From the youngest to the oldest American workers — GenZ to Baby Boomers — one of their greatest fears about retirement is ‘outliving my savings and investments,’” Catherine Collinson, CEO and president of nonprofit Transamerica Institute and Transamerica Center for Retirement Studies, told YahooMoney.
For instance, nearly 4 in 10 of those surveyed picked that as their biggest worry, outweighing concerns about cognitive decline, dementia, and Alzheimer’s Disease, according to Transamerica’s 2022 survey report.
Allocation can provide wiggle room
The Morningstar report also found that portfolios with balanced asset allocations — rather than those skewed more heavily toward stocks — supported higher starting withdrawal rates.
“In fact, an investor could dial the portfolio’s equity allocation all the way down to 30% of assets, with the remainder in fixed income and cash, employ a 3.8% starting withdrawal with annual inflation adjustments thereafter, and still have a 90% chance of not outliving the money over a 30-year period,” according to Morningstar’s report.
Bonds, too, may be a retiree’s best friend, according to one of the “surprises” in the findings, Morningstar’s personal finance director and co-author of research, Christine Benz, told Yahoo Money.
“Everyone seems to hate bonds right now, as they’ve had losses that are almost as bad as what stocks have had this year,” she said. “But better bond yields, and, in turn, returns, expectations, point to the value of holding bonds in retirement portfolios.”
In fact, portfolios with allocations of 30% to 60% in bonds supported the highest starting withdrawal rates over 30-year horizons, according to the Morningstar calculations.
“Over shorter time horizons, portfolios that were even more bond-heavy delivered the highest safe withdrawals,” she said.
Benz’s takeaway: “Stocks are beaten down but bonds are, too; plus, bonds have much lower volatility and variability in their returns than stocks. You don’t need to swing for the fences with an all-stock portfolio to earn a good return that supports a decent withdrawal rate.”
Planning for future adjustments can help, too
The report also focuses on the “base case,” which assumes the retiree is getting a fixed real withdrawal over his or her whole time horizon.
“But our paper focuses on different strategies that retirees can employ to wring a higher starting withdrawal. These range from simple tweaks like reducing withdrawals,” Benz said. “Simply not adjusting withdrawals upward for inflation after a losing year — such as keeping 2023 withdrawals the same as 2022 — allows retirees to start out with 4% withdrawals versus 3.8% in our base case.”
Benz’s second takeaway: “If you’re willing to live with even fairly small adjustments to your retirement paycheck to account for market conditions, you can take relatively more out initially.”
Meanwhile, research from David Blanchett, a managing director and head of retirement research at PGIM DC Solutions, found that retiree spending often trends lower throughout the retirement life cycle, though it might edge up a bit later in life. On average, retirees spend about one percentage point less than the actual inflation rate, according to Blanchett.
“This year we modeled his calculations in and found that it gave a lift to starting withdrawals — a 4.3% starting withdrawal versus 3.8% for our base case,” Benz said. “So if retirees assume they’ll spend less in the mid to late years of retirement, as many retirees do, they can spend a bit more early on, in the go-go post-retirement years.”
Time horizon is a big variable
Finally, age is a big factor in how much you can withdraw comfortably each year. Retirements with shorter time horizons of 10 to 15 years can use a higher withdrawal rate if using a conservative portfolio mix than they can with a more stock-heavy one, according to Morningstar.
“People who are in their 80s can spend more than the starting withdrawal rates we discussed in the paper because their time horizons are shorter than the 30-year horizon we used as our base case,” Benz said.
Kerry is a Senior Reporter and Columnist at Yahoo Money. Follow her on Twitter @kerryhannon