Retirees, Here’s What Your Withdrawal Rate Should Be in 2025

Key Takeaways

• Thanks to higher equity valuations and lower bond yields, capital markets assumptions for the major asset classes have come down a little bit, so the safe withdrawal is lower this year.
• In our base case, we assume a 30-year time horizon, and we run these various withdrawal rates through our Monte Carlo simulations. As of this year’s research, 3.7% was the highest that you could have taken.
• That highest safe withdrawal rate over the 30-year horizon corresponds with a fairly low equity weighting of just 20% to 50%.
• Retirees who want to spend more can explore flexible or dynamic withdrawal strategies.
• We found that if you increase benefits like Social Security, it has a really nice buffering effect that helps you put up with the more flexible withdrawal systems.

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar. People embarking on retirement should think about slowing their rate of portfolio withdrawals in the year ahead—so says new research from Morningstar on retirement spending. Joining me to discuss that research is Christine Benz. Christine is Morningstar’s director of personal finance and retirement planning, host of The Long View podcast, and author of the bestselling book, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement.

Good to see you, Christine. Thanks for being here.

Christine Benz: Good to see you too, Susan.

Why the Safe Withdrawal Rate Is Lower for Retirees in 2024

Dziubinski: All right. So, each year you and your colleagues produce this really comprehensive research about retirement income. And as part of that research, you try to identify what a safe withdrawal rate will be for the year ahead. So, now last year, your research suggested that 4% was that safe withdrawal rate. This year, it’s come down to 3.7%. Why is the number lower this year, Christine?

Benz: Well, we lean on our colleagues' capital markets assumptions. So, the folks who work in Morningstar Investment Management produce these capital markets assumptions, that then we turn into a 30-year sort of assumed return rate for various types of portfolios. Thanks to higher equity valuations, lower bond yields, those capital markets assumptions for the major asset classes have come down a little bit.

So, the net effect of that is that if you are really concerned about never running out of money over your retirement time horizon, and importantly, you just want to set a withdrawal rate and never revisit it again, and that’s another assumption that we make here, you should be cautious or be prepared to tap on the brakes in terms of your portfolio withdrawals.

How the Future Expectation of Returns Pulled Down the Safe Withdrawal Rate

Dziubinski: So, let’s delve into it. How do you reach conclusions about what a safe withdrawal rate is? And talk specifically, I guess, it’s because of the future expectation for returns is the reason it really went down, right?

Benz: Right. So, in our base case, we assume a 30-year time horizon. So, we assume someone’s retiring at age 65 and may pass away at age 95. So, we assume that 30-year horizon. And then, we want to run these various withdrawal rates through our Monte Carlo simulations. We want the ones, the withdrawal rates that have a 90% probability of success. So, as of this year’s research, 3.7% was the highest that you could have taken with that 30-year horizon.

One interesting dimension of the research, Susan, is that we look at various asset allocations and see how they would affect what would be a safe withdrawal rate. As in last year’s research, that highest safe withdrawal rate over the 30-year horizon corresponds with a fairly low equity weighting of just 20% to 50%. The reason is that the spending system that we use is so conservative. So, we’re assuming if I have $1 million portfolio, I get $37,000 in year one of my retirement. That’s a 3.7% withdrawal rate. Then, I’m just taking that $37,000, and I’m giving myself an inflation adjustment in each year thereafter. That’s a conservative spending system. That’s one reason why the withdrawal rates are so low this year.

A key message, though, that I would hope to impart is that people should explore strategies that help elevate that. They shouldn’t just relegate themselves to that very low spending rate.

When Retiree Spending Drops Throughout Retirement

Dziubinski: And let’s talk a little bit about spending in retirement. We have seen studies that say that retirees don’t actually spend the same amount over the course of their retirement. They tend to spend more at the beginning and maybe it tapers down. Talk a little bit about that.

Benz: Yeah. It’s really an important point. Our former colleague, David Blanchett, who’s now at PGIM, did some great research where he examined actual retiree household spending. So, the same households observed over their retirement time horizon. He observed a definite pattern of people tending to spend the most just right out of the gate in retirement, pent-up demand years, and then spending levels down fairly significantly throughout the retirement time horizon, and then elevates for some older adults, not all, later in life if they have uninsured long-term care costs.

So, I think that’s an important finding. In fact, every time we talk to David about this research, he thinks that people ought to think about these actual spending patterns and use them to influence how they spend. And indeed, we incorporated that into this year’s research and found that people who do assume that their spending will trend down, they can spend more at the outset. So, I think that’s a particularly important takeaway for people who have tight financial plans. None of us know how long our lives will be. You want to make sure that you are maximizing your lifetime spending.

Dziubinski: Let’s talk a little bit about this 3%. It sounds kind of shrimpy.

Benz: It does.

How Flexible Withdrawal Strategies Can Help Retirees Spend More

Dziubinski: What are some strategies that retirees could explore to perhaps support a higher number?

Benz: The main one is to explore flexible or dynamic withdrawal strategies. We looked at several in the paper, as we have in previous years' research. I think that if you were to ask our team which one we like the most, it’s probably what’s called the guardrails approach to retirement spending, developed by Jonathan Guyton and William Klinger. It’s a strategy that does tether your withdrawals to how the portfolio has performed. But as Jon Guyton has said, in fact, he said in my book, it’s a strategy that really aligns with how people react behaviorally. That they tend to want to spend less when they see their portfolios decline in great years like 2024, they’re probably feeling a little more flush, well guess what? You can probably spend more in those years. I think that people who want to make sure they maximize their lifetime consumption and lift their spending higher than that 3.7% level ought to explore some of these flexible strategies.

Then, it’s also important to remember how age and time horizon factor into this. I would hate for someone who is 75 to say, “Oh, I can only spend 3.7% this year.” Well, look at the tables in our research. You’ll see that if your time horizon is a little shorter, if it’s say 20 years, it elevates that spending rate meaningfully. So, bear in mind that you should be spending more as you go along and as your time horizon shrinks.

How Nonportfolio Income Can Act as a Buffer for Flexible Withdrawal Strategies

Dziubinski: Also in this year’s research, your team examined the role of nonportfolio income sources like Social Security and annuities and what role they can play in helping you choose the right system for you as a retiree when it comes to your withdrawal rate. Talk a little bit about that.

Benz: Yeah. This was a section that our colleague, Jason Kephart, worked on, and it’s just fascinating research, where he examined the interplay between these portfolio spending strategies and nonportfolio sources of income. One interesting finding is that when you look at elevating, say, Social Security, if you increase that benefit, it has a really nice buffering effect that helps you put up with the more flexible withdrawal systems.

So, when you see the flexible withdrawal systems on a stand-alone basis, you look at them and say, “Oh my goodness, that’s a lot of changing around of cash flows.” But when paired with the nonportfolio sources of income that all of us will have in retirement, what you see is that those flexible withdrawal systems become a lot more palatable. Jason includes some really helpful examples to help people think this through. So, I think that’s an important dimension of this. In fact, I would say that this business of enlarging guaranteed income should really precede any activity about deciding how much to take out of your portfolio. Job one is figuring out how to boost those other sources of cash flow.

Dziubinski: Well, as always, Christine, that’s great research, and you guys always manage every year to iterate on it and make it even more useful. So, I think everyone appreciates that.

Benz: Thank you so much, Susan.

Dziubinski: I’m Susan Dziubinski with Morningstar. Thanks for tuning in.

Watch The Best Ways to Maximize Your Retirement Income in 2025 for more from Christine Benz.