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December 13, 2022 at 01:21 PM
What You Need to Know
- A recent paper from Morningstar identifies 3.8% as the “safe” starting withdrawal rate for a new retiree.
- Planning expert David Blanchett says that number is likely too low, but it all depends on the client’s individual circumstances.
- Blanchett urges readers to explore the more nuanced parts of the Morningstar paper that go beyond the topline withdrawal figure.
Earlier this week, Morningstar published a detailed new analysis seeking to determine how much a theoretical retiree can “safely” withdrawal from their portfolio at the start of their retirement period.
According to Morningstar’s model, a starting withdrawal rate of 3.8% is safe over a 30-year time horizon, meaning it brings a 90% likelihood of not running out of funds. The analysis uses rolling historical return data and assumes a balanced portfolio of 50% stocks and 50% bonds.
Given Morningstar’s reach, the paper quickly grabbed the attention of retirement planning experts, including David Blanchett, managing director and head of retirement research at PGIM DC Solutions. In fact, Blanchett quickly jumped on the phone with ThinkAdvisor to offer both commendation and a light critique of some of the paper’s conclusions.
As Blanchett said, research that seeks to establish a single safe withdrawal number can be helpful and informative in the hands of skilled financial professionals. However, he worries that the general public could easily misinterpret Morningstar’s new 3.8% withdrawal figure — and that it could lead to widespread underspending and other suboptimal outcomes if followed too strictly.
A Word of Caution
“The safe withdrawal rate topic is one that I and many colleagues have been doing research on for the better part of two decades,” Blanchett said. “I commend Morningstar for its analysis, and I still do think success rate research is useful, but I personally no longer try to provide guidance to the general public using such numbers.”
The reason for the reticence, Blanchett explained, is that the single safe withdrawal number masks so much complexity baked into the retirement planning process. Most people can expect to supplement their portfolio withdrawals with some amount of income coming from Social Security, for example, while others will anticipate an inheritance or some other source of wealth outside their investment portfolio of stocks and bonds.
As such, Blanchett said, it would be better for people to focus on the parts of the Morningstar paper that dig into this complexity. Indeed, much of the paper is spent exploring alternative withdrawal strategies that may better fit the factual and behavioral circumstances of a given retiree, such as making withdrawals based on the required minimum distribution amount or utilizing a set of income guardrails that move with market returns while setting an income floor.
“For what it is worth, my guidance would be closer to a 5% starting withdrawal figure for someone entering retirement right now,” Blanchett said. “Yes, they likely experienced significant portfolio losses this year, but they now also have higher anticipated future returns that help to offset those losses.”
