David Blanchett: The Problem With 'Safe' Retirement Withdrawal Rates

Earlier this week, Morningstar published a detailed new analysis seeking to determine how much a theoretical retiree can "safely" withdrawal from their portfolio at the start of their retirement period.

According to Morningstar's model, a starting withdrawal rate of 3.8% is safe over a 30-year time horizon, meaning it brings a 90% likelihood of not running out of funds. The analysis uses rolling historical return data and assumes a balanced portfolio of 50% stocks and 50% bonds.

Given Morningstar's reach, the paper quickly grabbed the attention of retirement planning experts, including David Blanchett, managing director and head of retirement research at PGIM DC Solutions. In fact, Blanchett quickly jumped on the phone with ThinkAdvisor to offer both commendation and a light critique of some of the paper's conclusions.

As Blanchett said, research that seeks to establish a single safe withdrawal number can be helpful and informative in the hands of skilled financial professionals. However, he worries that the general public could easily misinterpret Morningstar's new 3.8% withdrawal figure — and that it could lead to widespread underspending and other suboptimal outcomes if followed too strictly.

A Word of Caution

"The safe withdrawal rate topic is one that I and many colleagues have been doing research on for the better part of two decades," Blanchett said. "I commend Morningstar for its analysis, and I still do think success rate research is useful, but I personally no longer try to provide guidance to the general public using such numbers."

The reason for the reticence, Blanchett explained, is that the single safe withdrawal number masks so much complexity baked into the retirement planning process. Most people can expect to supplement their portfolio withdrawals with some amount of income coming from Social Security, for example, while others will anticipate an inheritance or some other source of wealth outside their investment portfolio of stocks and bonds.

As such, Blanchett said, it would be better for people to focus on the parts of the Morningstar paper that dig into this complexity. Indeed, much of the paper is spent exploring alternative withdrawal strategies that may better fit the factual and behavioral circumstances of a given retiree, such as making withdrawals based on the required minimum distribution amount or utilizing a set of income guardrails that move with market returns while setting an income floor.

"For what it is worth, my guidance would be closer to a 5% starting withdrawal figure for someone entering retirement right now," Blanchett said. "Yes, they likely experienced significant portfolio losses this year, but they now also have higher anticipated future returns that help to offset those losses."

In the end, Blanchett said, the 3.8% withdrawal figure is an informative and helpful starting point for the income planning discussion. It is not the end of the discussion, though, and the full planning process should also include consideration of guaranteed income and other forms of insurance that can bolster a portfolio-based approach.

The Need for Advice

Blanchett said the safe withdrawal debate points clearly to the value that financial planning delivers to retirees, whether it is delivered by a full-service wealth manager or a tech-based robo-advisor platform.

"The real way to ensure a safe withdrawal rate while avoiding underspending is to revisit your assumptions every year in collaboration with a financial planning professional," Blanchett said. "Those with lower balances may need to rely more on technology for this support. In this sense, it is really encouraging to see robo-advisor solutions growing more sophisticated and capable with respect to income planning."

As Blanchett reflected, the original 4% safe withdrawal research framework emerged more than 30 years ago, when financial services consumers (and everyone else for that matter) could only access a fraction of the computing power that is available today. In that setting, providing a generalized safe withdrawal number made more sense than it does today because the general public might not have had any other income planning support.

Today, the picture looks a lot different, Blanchett said.

"Right now, if you have a $5 million or $10 million portfolio, then yes, you probably need that individualized advice from a skilled wealth management professional," Blanchett said. "However, we are quickly getting to the point where the mass affluent and middle-class savers can be really well supported by advisory technology."

Blanchett said he expects the growth of robo-advisors to complement, rather than reduce or eliminate, the work of wealth managers as the U.S. retirement market grapples with income planning.

"When the robo-advisor platforms were emerging 10 years ago, there was this suggestion that advisors would be put out of the job," Blanchett said. "In reality, we are moving towards a more holistic ecosystem where there will be more avenues for all types of consumers to receive critical advice and guidance across in-person and tech-based services. I think that is really encouraging."