Retirees: Here’s What Your Portfolio Withdrawal Rate Should Be in 2024

Key Takeaways

• If you’re someone who is comfortable with more variability, you can arguably take more from your portfolio initially.
• If someone is legacy-minded, they definitely want to be thinking about a higher equity percentage than is the case with our base case.
• If you’re willing to dabble in some of these variable spending systems, you can nicely elevate your starting withdrawal as well as your lifetime portfolio withdrawal.

Susan Dziubinski: Hi, I’m Susan Dziubinski for Morningstar. One of the key measures of the health of a retiree’s plan is how much you’re spending per year. Joining me to discuss Morningstar’s new research on the topic and the implications for how much retirees can reasonably pull out of their portfolios in 2024 is Christine Benz. She is co-author of Morningstar’s annual study on retirement income. But before we dive in, I’d like to let viewers know that Christine and the other co-authors of this study had an excellent conversation about the topic of retirement income in general and their findings of their research in particular during a recent episode of Christine’s podcast, The Long View. Viewers can find a link to the podcast beneath this video.

Hi, Christine. Good to see you.

Christine Benz: Hi, Susan. Great to see you.

Can Retirees Withdrawal 4%?

Dziubinski: Christine, let’s dig into the study’s findings. Now, the research found that new retirees can reasonably withdraw 4% initially if they want their money to last for 30 years. So, does that mean all retirees can just withdraw 4%?

Benz: Not necessarily. So, time horizon is super important when thinking about this. In our base case in this research, we assume a 30-year time horizon. So, we’re assuming, say, a 65-year-old who thinks that they will live until, say, age 95. And in that case, when we look at that 30-year time horizon, a 90% probability of not running out of funds over that 30-year horizon, we come up with 4% when we plug it all into our Monte Carlo simulations. But if you have, say, a shorter time horizon, maybe you’re a 75-year-old retiree and you’re thinking of more like a 20-year time horizon. In that case, you can take about 5.5% according to our research. If you’re a young retiree, say, a 55-year-old with maybe more like a 40-year time horizon, you’d need to be more conservative. You’d need to take more like 3.3% as of our latest research. So, think about your time horizon.

Also think about the predictability of cash flows that you want from your portfolio. So, if you’re someone who wants a very steady paycheck equivalent from your portfolio, which is kind of what we assumed in our base case, that generally points to needing to be more conservative in terms of your withdrawal, your starting withdrawal percentage. If you’re someone who is comfortable with more variability—and I know we’re going to talk about that—you can arguably take more from your portfolio initially.

What Equity Exposure Should Retirees Maintain?

Dziubinski: Now, you say that your assumptions here are a little conservative. So, in that base case you discussed, the highest safe withdrawal percentage corresponds to portfolios that have between 20% to 40% equity exposure. So, does that mean that’s the equity exposure that retirees should be maintaining?

Benz: Well, again, not necessarily. And I think that gets back to this base case that we use, that the spending pattern that we are asking for is very conservative. So, we’re saying someone just wants very steady cash flows from their portfolio. And so, when we put this all in the simulation, it basically says, OK, there are higher yields on offer from cash, from bonds today. Give me more of that stuff. We want more of that if the goal is to generate that steady paycheck from the portfolio. Someone who is comfortable with more variability in terms of the payday would probably want to favor more growth assets, more equity assets. And the reason is that that will allow for a higher spend from the portfolio over the whole horizon and that it may also allow for more leftovers at the end of someone’s life expectancy. So, if someone is legacy-minded, they definitely want to be thinking about a higher equity percentage than is the case with our base case.

Can Retirees Who Are Willing to Adjust Their Spending Take More Than 4%?

Dziubinski: How about for retirees who are willing to adjust their spending over time? You alluded to that earlier. Can they take more than the 4% that your base case suggests?

Benz: They absolutely can. We explore a variety of tweaks and adjustments that you can use to the spending patterns. And one that we have explored the past few years is just a simple rule of thumb where if the portfolio loses value—so think of like 2022, most portfolios lost value—the year after that, you don’t get an inflation adjustment. And what we found when we incorporate that very simple tweak is that you’re able to enlarge the payday, so to 4.4% by just being willing to make that simple adjustment after the portfolio has had losses. If you’re comfortable with even more variability both to the upside and the downside, so if you’re looking at a system like the guardrail system, which we detail in the paper, which was developed by Jonathan Guyton and William Klinger, you can take an even higher starting percentage, so more like 5.5%, assuming a 30-year horizon and a 90% probability of success. So, if you’re willing to dabble in some of these variable spending systems, you can nicely elevate your starting withdrawal as well as your lifetime portfolio withdrawal.

Implications for Safe Withdrawal Rates

Dziubinski: One added dimension to the research that you all did most recently is that you factored in data about how retirees actually spend. What did you find, and what are the implications there for safe withdrawal rates?

Benz: Right. This was a contribution from Amy Arnott. Amy is one of our co-researchers. And the idea was to look at some research provided by the Employee Benefit Research Institute that looks at how spending changes over the retirement lifecycle. And the big-picture takeaway from that research is that people tend to spend less as the years go by. And they even spend less if they’re wealthy. So, a natural question might be: Are they spending less because they’re worried about running out? No. We see this across income bands. So, when we plug in the extent to which spending tends to actually trend down and we assume that natural downtrend in spending, we see a nice elevation in starting spending patterns. So, you can get the starting withdrawal rate over 5%. You just have to be OK with that trade-off that further on in retirement, you have to spend less. But for a lot of people with tight plans who really want to maximize their retirement consumption, their enjoyment in those early years of retirement when they’re feeling good and they have pent-up demand to do fun things, they should take a look at that.

Social Security and Annuities

Dziubinski: That’s very interesting. Now this year’s research also delves into guaranteed income sources like Social Security and annuities and the implications of those two income sources on portfolio spending. What are the headlines there?

Benz: I would say the more we’ve all looked at this problem of portfolio spending, the more it’s clear that getting more guaranteed income into the portfolio spending plan or into the retirement spending plan is all for the good. So, you can enlarge Social Security by delaying, which may be advantageous if you have a longer-than-average life expectancy. You can look at maybe simple annuities as part of the plan. And the idea is that if you have more of your fixed expenses covered with those nonportfolio income sources, then you can be more comfortable with some of these variable systems that we were just talking about. You can be comfortable with having some variation in your paydays because it’s not digging into your family’s bread and butter, right, that it’s maybe vacation and more discretionary spending. So, I really like that combination of more fixed income, do what you can to enlarge fixed income, then look at some of these more-flexible portfolio spending systems.

Dziubinski: It sounds like, Christine, the big takeaway is, A, the news is pretty good and B, it’s about trade-offs, like everything in life, right?

Benz: Exactly. Exactly, Susan.

Dziubinski: Well, thank you for your time.

Benz: Thank you so much, Susan.

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

Watch “5 Portfolio Lessons From 2023“ for more from Christine Benz.