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David Blanchett

Retirement Planning > Spending in Retirement > Income Planning

Retirement Pros Take On Inflation, 4% Rule at Morningstar

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What You Need to Know

  • When it comes to inflation’s effect on retirees, the big concern is health care, David Blanchett noted.
  • Just because there has been economic turmoil doesn't mean we need to change up retirement rules, said Karsten Jeske.
  • Long-term care is the major concern now, said Christine Benz.

When it comes to inflation’s effect on retirees, the big concern is health care. For example, at age 65, 10% of savings might be spent on it, but at 85, that jumps to 20%, said David Blanchett, managing director and head of retirement research for PGIM DC Solutions, at Morningstar’s annual conference session, State of Retirement Income, held Wednesday.

Also on the panel were Christine Benz, Morningstar director of personal finance and retirement planning, and Karsten Jeske, founder of Early Retirement Now. It was moderated by Jeff Ptak, Morningstar chief ratings officer and co-host with Benz of the podcast “The Long View.”

Current Markets

Ptak wondered if current market conditions mean a change in withdrawal strategies.

Just because there’s been an economic shock “doesn’t mean we have to throw out everything we know,” Jeske said, adding that previous studies on safe withdrawal rates took into consideration worst-case scenarios. “We’re not out of bounds now of historical intervals, such as double-digit inflation in the 1980s.”

He added that he doesn’t see a 70% stock market drop as in the 1929 period happening. He said, however, that “maybe 4% [withdrawal rate] does work, but [withdrawing at] a lower rate might be more pleasant,” especially in hedging uncertainty.

Benz noted that for those in accumulation mode, buying in the down market works. “Perhaps [recent market turmoil] hasn’t felt good … yet it could take pressure off savers in the long run,” she said.

What should retirees do if bonds “get whacked”? Ptak asked.

“Stay the course,” Blanchett responded. “Also look at alternative investments. But it’s foolish to think 60/40 isn’t valid. It is.”

Jeske said he might raise risk a little by moving a portfolio to 70/30, noting that bond yield at 3% could be a diversifier.

4% Rule

The speakers were somewhat mixed on the 4% withdrawal rule. Blanchett said he might push it to 5%, but it depends on household spending.

Jeske, a proponent of the Financial Independence, Retire Early movement, known as FIRE, said some people in the “early retirement community” — those in their 40s and 50s — “don’t take into account that they will have Social Security, so they first withdraw from their portfolio.” He said it’s a multi-staged process that is personalized for each client.

A recent study by Benz and colleagues came up with 3.3% as a good withdrawal rate, Benz said, noting that “fixed [amounts] are kind of a straw man. People don’t really spend that way.” She said the best strategy that they tested was using  “guardrails,” in which predefined thresholds trigger an increase or decrease in retirement spending as needed.

Benz is also a big proponent of “bucketing” — structuring a portfolio, based on timing of withdrawals, into immediate, intermediate and long-term buckets. She worries about those who underspend and might hurt their quality of life, urging a liquidity bucket to help improve this.

But “the reason you see people underspend is they’ve undersaved,” Blanchett said. “It’s hard, because you’re not sure how long you’ll live. They don’t want to deplete capital.”

Jeske said plans have to be updated as people age. For example, they need to work around their asset allocation now to make it through a weak economy, “but they can’t be overly bond heavy. … They’ll want diversification benefits.”

Guaranteed Income

When asked about annuities, Blanchett said the best way to get guaranteed income was to “delay claiming Social Security.” But the question becomes, “how much do you need as far as guaranteed income?” He added that no private annuity today links to inflation and that “Social Security is the only play to get that implicit hedge.”

Jeske noted that annuities may be good for those who need a “consumption floor,” but that might be depleted over time, especially as inflation could continue to be high. He added that “Social Security is very valuable now.”

Ptak asked whether Social Security will be there when the younger generations need it.

“Yes, but it may not be fully funded,” Blanchett said.

Jeske agreed, stating that changes will be rolled in slowly, especially for those between 35 and 55.

Benz added that a bigger concern is the high costs of long-term care. “There are not any good answers,” she said. “Long-term care insurance is quite troubled.”

Affluent investors are less likely than others to have financial trouble in old age, she said, but they should still have a “fourth bucket” that will handle end-of-life issues.


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