Morningstar Advises 3.8% “Safe” Withdrawal Rate, Balanced Portfolio

Morningstar increased its recommended withdrawal rate for retirees from last year and continues to see best outcomes for participants in both bonds and stocks.

Morningstar’s annual model of how much a retiree with a balanced portfolio should withdraw over a 30-year time horizon increased to a starting point of 3.8% on the back of higher bond yields and lower equity valuations.

The investment data and insights provider said the return outlooks were appreciably higher than last year, when the firm recommended a “safe” withdrawal rate of 3.3%. That rate made waves at the time because it went against the industry standard of a 4% withdrawal rate for a retirement portfolio balanced roughly 50-50 between stocks and bonds. At the time, stock valuations were high and interest rates low.

This year’s recommended rate was created in a very different environment, due to changing stock values, bond yields and the impact of inflation, says Christine Benz, Morningstar’s director of personal finance.

“Interest rates is a big component,” Benz says. “Your yield as a bond investor is such a big component of your return likelihood that your withdrawal rate jumps significantly for fixed income.”

Being able to withdraw more, however, is of course less helpful when the pool of savings’ value has dropped. With retirement plan portfolios down as much as 23% this year for many workplace plan savers, the thought of having more to withdraw may be cold comfort, Benz says.

“It’s the amount that really matters, and a higher withdrawal rate may not deliver enough cash flow for some,” she says.

Success, For Now

The Morningstar report, “The State of Retirement Income 2022,” gives savers with a balanced portfolio a 90% probability of success withdrawing about 3.8% of their savings. The modelling assumes that inflation — while potentially elevated into next year — will average about 2.8% over the next 30 years, Benz says.

The good news for many retirees is that, even if inflation stays elevated, they tend to have fewer everyday costs, Benz says. Many retirees own their homes, do not drive as much and could even be seeing some relief on medical costs.

According to a separate study issued Thursday by Bank of America, 70% of homeowners ages 45 to 76 plan to or have retired in the home they already own. Among those planning to stay in their homes when they retire, 78% see no reason to move, while 22% say they’ve put so much work into their home that they don’t want to move.

This year, Morningstar also considered analysis that retirees tend to spend the most at the start of retirement and reduce spending as they get older. That equation can help retirees determine whether they can take out more early on, with plans to taper off as time passes, Benz says. Meanwhile, once retirees reach their 80s, if they have enough assets, Benz says there is “no reason” not to take out more than 3.8%.

No matter how much planning takes place, as 2022 showed, things can change quickly both in the short term and for longer-term outlooks, the researchers noted.

“The results make clear that one period’s results cannot be used to predict those of the next period,” the report stated. “Bond yields change, stock valuations shift and inflation rates rise and fall. Each has a strong effect on both portfolio performance and safe withdrawal amounts.”

Benz notes concern that some will be scared off of fixed income after seeing what is usually considered the safest form of investment showing up as a loss in their retirement portfolios.

“I think that fixed income is shaping up as a deeply unloved asset type,” she says. “I wonder if people will be scarred for a generation after stocks and bonds are both on track to lose almost the same amount this year.”

Overall, the study points to the value of balance, Benz says.

“Over the usual retirement time horizon, balanced allocations lead to the highest starting withdrawal amounts,” she says.

Bipartisan Group Introduces Bill for Portable Federal Retirement Accounts

Legislation would establish a new program to give eligible workers access to portable, tax-advantaged accounts.

U.S. Senators John Hickenlooper and Thom Tillis and Representatives Terri Sewell and Lloyd Smucker Friday introduced the Retirement Savings for Americans Act, to create a program that would give American workers access to portable, tax-advantaged retirement savings accounts, with federal matching contributions for certain low- and middle-income workers.

The proposed savings program would offer investments similar to those offered to federal and military workers in the Federal Retirement Thrift Savings Plan. The proposed bill anticipates providing a menu of low-fee investment options, including target date funds tied to a worker’s estimated retirement date and stock and bond index funds, according to information from Hickenlooper’s office. The federal match would be a federal income tax credit, according to the draft bill.

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Smucker, R-Pennsylvania, said the bill is intended to advance the pending SECURE 2.0 legislative package and build on it when the Retirement Savings for Americans Act is reintroduced in the next Congress.

“Too many Americans are working their entire adult lives only to reach retirement and find they don’t have enough saved,” Hickenlooper, D-Colorado, said in a release. “Helping people save is an easy, efficient way to cut income inequality while making sure all workers get the retirement they’ve earned.”

Co-sponsor Tillis, R-North Carolina, added, “Roughly 40 million Americans lack access to an employer-sponsored retirement plan, which represents a significant roadblock to achieving financial security for their retirement.”

Sewell, D-Alabama, and Smucker are co-sponsors in the House.

“This critical, bipartisan legislation would address serious gaps in our retirement system and make it easier for low- and middle-income workers to save for retirement,” Sewell said in the statement.

This legislation is aimed at providing retirement savings accounts to the up to 60% of U.S. workers that lack access to an employer-sponsored retirement plan, according to information from Hickenlooper’s office.

Many states have launched state-sponsored programs to enable workers without access to an employer-sponsored plan to save. In recent years, workers have saved more than $574 million through such state programs, according to information from the Center for Retirement Initiatives at Georgetown University. The largest state-sponsored programs are CalSavers, OregonSaves and Illinois Secure Choice. Overall, there are 16 state-sponsored programs and two city-sponsored programs.

The state and local programs do not offer matching contributions.

Information provided by Hickenlooper’s office says the federal Retirement Savings for Americans Act contains the following provisions:

  • Eligibility and auto enrollment: Full- and part-time workers who lack access to an employer-sponsored retirement plan would be eligible for an account, and they would be automatically enrolled at 3% of their income. They could choose to increase or decrease their withholding or opt out entirely at any time. Independent workers (including gig workers) would also be eligible.
  • Federal contribution: Low- and moderate-income workers would be eligible for a 1% automatic contribution (as long as they remain employed) and up to a 4% matching contribution via a refundable federal tax credit. This would begin to phase out at median income.
  • Portability: Accounts would remain attached to workers throughout their lifetimes, and workers would be able to stop and start contributions at will.
  • Private assets: The accounts would be the property of the worker, and the assets could be passed down to future generations to help them build wealth and financial security.
  • Investment options: Much like the current Thrift Savings Plan, participants would be given a menu of simple, low-fee investment options to choose from, including lifecycle funds tied to a worker’s estimated retirement date and index funds made of stocks and bonds.

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