In a new video analysis posted last week to Morningstar's website, Christine Benz, director of personal finance and retirement planning, reviews the key findings of her much-discussed (and much-debated) December 2022 research report on safe retirement withdrawal rates.
The paper, called the "Retirement Withdrawal Strategies Report," generated significant buzz among retirement advisor professionals for its conclusion that a safe initial withdrawal rate as of the end of 2022 was just 3.8% — a figure falling below the seemingly ubiquitous 4% withdrawal rule so commonly cited by industry practitioners.
While the topline number burned up much of the oxygen in the room, Benz's paper also emphasized that the "right" withdrawal rate for any given individual depends on various factors, from their portfolio's asset allocation and the market's anticipated behavior to their projected time horizon and consumption preferences.
In her new video update, Benz directly addresses the debate about the utility of "safe" withdrawal figures and whether her 2022 report, which was penned with Morningstar's Jeffrey Ptak and John Rekenthaler, offers an artificially high or low figure.
According Benz, many people retiring today can indeed reasonably take a higher initial withdrawal percentage than 3.8%, but there is still good reason to be cautious about overspending early in retirement.
Monte Carlo Considerations
As Benz explains the workflow that underpins the 2022 paper, she and her fellow researchers used what are called Monte Carlo simulations to figure out what someone could safely take out of their portfolio.
The "safe withdrawal" figure, she explains, represents what percentage a person could withdrawal in year one of their retirement using a balanced portfolio while maintaining a 90% success rate — that is, a 90% chance of not running out of funds over that 30-year horizon.
"We assumed a fixed real withdrawal system for those retirement withdrawals," Benz adds. "So, we're assuming that someone is taking X percentage in year one of retirement, and then inflation-adjusting that dollar amount thereafter."
Benz and company used additional inputs received from colleagues across Morningstar Investment Management for expected stock returns, expected bond returns and expected inflation over that 30-year horizon.
"What we actually saw is a little bump up in safe withdrawal rates in 2022 versus what they were in 2021," Benz point out, noting that 2021's number was a "kind of a worrisome 3.3%."
"Thanks to increasing bond yields as well as lower equity valuations, we came out with a 3.8% number in 2022," Benz explains. "That's because the team in Morningstar Investment Management expects that stock returns will be higher over the next 30 years and bond returns will also be higher."
Inflation Forecast
According to Benz, inflation projections play a big part in this analysis, but not necessarily in the way one would expect.
"Inflation is top of mind for all of us today, but the fact is, we're planning for a 30-year time horizon," Benz says.
While core inflation today is in the realm of 6%, Morningstar's long-term estimate stands at 2.8% as of late 2022.
"So, over that 30-year horizon, the expectation is that inflation will be elevated a little bit for the next couple of years but then will level off to a more normal level going forward," Benz says. "When we ran this study in 2021, the forecast that we were using was 2.2%. So, it's a little bit elevated, but not a lot elevated. It's nowhere near the 7% inflation level that we've had over the past year in the U.S."
