Page 32 - Investment Advisor February/March 2023

Cover Story

This is not necessarily a straightforward consideration, RMDs. For this reason, it is always important to keep a broader
according to Piershale and Rubin, as it is not uncommon for perspective when analyzing conversion opportunities.
clients to move between higher and lower tax brackets as their
retirement income fluctuates. This happens because of factors John Manganaro is a senior retirement reporter and can be reached at
such as Social Security claiming choices and the triggering of [email protected].

The Problem With ‘Safe’ Retirement Withdrawal Rates
Morningstar recently published a detailed look at how much a “For what it is worth, my guidance would be closer to a 5%
theoretical retiree can “safely” withdrawal from their portfolio starting withdrawal figure for someone entering retirement
at the start of their retirement period. The analysis aimed to right now,” Blanchett explains. “Yes, they likely experienced
retest the famous 4% withdrawal rule and see if it still indeed significant portfolio losses during 2022, but they now also
represents a safe rate for sustainable income generation. The have higher anticipated future returns that help to offset
short answer is no. those losses.”
According to Morningstar’s model, a lower starting with- The safe withdrawal debate points clearly to the value that
drawal rate of 3.8% is safe over a 30-year time horizon, financial planning delivers to retirees, whether it is delivered
meaning it brings a 90% likelihood of not running out of by a full-service wealth manager or a tech-based robo-advi-
funds. The analysis uses rolling historical return data and sor platform, he points out: “The real way to ensure a safe
assumes a balanced portfolio of 50% stocks and 50% bonds. withdrawal rate while avoiding underspending is to revisit
The paper quickly grabbed the attention of retirement plan- your assumptions every year in collaboration with a financial
ning experts, including David Blanchett, managing director planning professional.”
and head of retirement research at PGIM DC Solutions. He Plus, those with lower balances “may need to rely more on
says research that seeks to establish a single safe withdrawal technology for this support,” he says. “In this sense, it is really
number can be helpful and informative in the hands of skilled encouraging to see robo-advisor solutions growing more
financial professionals; however, he worries that the general sophisticated and capable with respect to income planning.”
public could easily misinterpret Morningstar’s new 3.8% The original 4% safe withdrawal research framework
withdrawal figure — and that it could lead to widespread emerged more than 30 years ago, when financial services
underspending and other suboptimal outcomes if followed consumers (and everyone else for that matter) could only
too strictly. access a fraction of the computing power that’s now avail-
“The safe withdrawal rate topic is one that I and many col- able. In that setting, providing a generalized safe withdraw-
leagues have been doing research on for the better part of al number made more sense than it does today because
two decades,” Blanchett explains. “I commend Morningstar the general public might not have had any other income
for its analysis, and I still do think success rate research is planning support.
useful, but I personally no longer try to provide guidance to In 2023, the picture looks a lot different, Blanchett
the general public using such numbers.” explains: “Right now, if you have a $5 million or $10 million
The reason for the reticence, Blanchett explains, is that the portfolio, then yes, you probably need that individualized
single safe withdrawal number masks so much complexity advice from a skilled wealth management professional.
baked into the retirement income planning process. Most However, we are quickly getting to the point where the mass
people can expect to supplement their portfolio withdrawals affluent and middle-class retirees can be really well sup-
with some amount of income from Social Security, for ported by advisory technology.”
example, while others will anticipate an inheritance or some In this sense, he expects the growth of robo-advisors to
other source of wealth outside their investment portfolio of complement, rather than reduce or eliminate, the work of
stocks and bonds. wealth managers as the U.S. retirement market grapples with
As such, he says, it could be better for people to focus on income planning.
the parts of the Morningstar paper that dig into this complex- “When the robo-advisor platforms were emerging 10 years
ity. Indeed, much of the paper is spent exploring alternative ago, there was this suggestion that advisors would be put out
withdrawal strategies that may better fit the factual and of the job,” Blanchett says. “In reality, we are moving towards
behavioral circumstances of a given retiree, such as making a more holistic ecosystem where there will be more avenues
withdrawals based on the required minimum distribution for all types of consumers to receive critical advice and guid-
amount or utilizing a set of income guardrails that move with ance across in-person and tech-based services. That is really
market returns while setting an income floor. encouraging.” —John Manganaro

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