How should investors and their advisors use our annual retirement-spending research?
Let’s start with how they should not use it: as a guide for each year’s withdrawals once retirement has commenced. While we’ve been revisiting this research annually, we’re not suggesting that the retiree who followed our 2021 research would take a 3.3% withdrawal in 2022, 3.8% in 2023, 4.0% in 2024, 3.7% in 2025, and 3.9% in the year ahead to reflect each edition’s findings. Ratcheting spending up or down in line with Morningstar’s latest recommendations is apt to introduce more volatility into retirees’ cash flows than they’re likely to find acceptable.
Rather, our base case assumes that the retiree withdraws a given percentage at the outset of retirement—say, $33,000 on a $1 million portfolio at the beginning of 2022—and then inflation-adjusts that dollar amount or uses some other method to adjust subsequent expenditures thereafter.
This research shouldn’t be construed as a market call, either. While it does embed Morningstar Multi-Asset Research team’s capital markets assumptions, that forecast is long-term, and we use an even longer, 30-year horizon for our spending simulations. Even though the highest safe spending rate in our “base case” corresponds with a portfolio with just 30% to 50% in stocks, that’s an outgrowth of the very conservative spending system that we use in our modeling; we assume that the retiree wants to take the same amount out, on an inflation-adjusted basis, year by year.
Instead, the research might be the most valuable to investors and their advisors in the following situations.
Use Case 1: As a Temperature Check
Because our research employs forward-looking inputs for stock and bond market returns and inflation, it can help provide a temperature check on how aggressive or conservative retirees might be with their withdrawals in the near future.
When our base-case starting safe withdrawal percentage was just 3.3% in late 2021, for example, that was a signal to retirees to be prepared to tap on the brakes with withdrawals; bond yields were ultralow, and equity valuations were high. And indeed, caution on portfolio withdrawals was valuable yields/return prospects and moderating inflation. Our 2024 and 2025 research points to a starting safe withdrawal rate in that same ballpark: Equity valuations aren’t inexpensive, but bond yields are a plus for balanced portfolios.
Use Case 2: To Depict the Interplay Between Age and Spending
Additionally, the research illustrates how age influences safe spending rates. All else being equal, safe spending rates may increase with age. While our base-case simulation assumes a 30-year spending horizon and therefore is best suited to new, traditional-age retirees, the research can also provide a valuable spending check for people who have been retired for several years or more. In our research, we show that a retiree with a 20-year anticipated time horizon/life expectancy (rather than 30) can reasonably spend more than 5% of a balanced portfolio, with that dollar amount inflation-adjusted thereafter. Meanwhile, the retiree with a 15-year spending horizon could reasonably spend nearly 7% of their portfolio, with that dollar amount inflation-adjusted thereafter. By contrast, early retirees will want to keep caution in mind when calculating a starting safe withdrawal percentage, assuming our “base-case” spending system. For example, in our base case, the highest starting safe withdrawal percentage for a 40-year horizon is just 3.3%.
Use Case 3: To Illustrate the Trade-Offs That Accompany Various Spending Strategies and Asset Allocations
Another potential use for this research is to illustrate the trade-offs that accompany various spending strategies, from more rigid, paycheck-equivalent spending strategies like the base case to ones that entail more variability. The findings of this research can help advisors and individual investors home in on the right withdrawal system, given the retiree’s preferences on a few key variables.
Lifetime Spending: Nearly all of the flexible spending strategies that we discuss in the paper enlarge lifetime spending relative to the base case, which assumes static real expenditures. That’s because such strategies reduce spending following portfolio losses, while most allow for raises following strong gains. Dynamic strategies will be most agreeable for retirees who have a healthy share of their necessary living expenses coming from nonportfolio sources of income like Social Security and/or pensions.
Cash Flow Consistency: For retirees who prize cash flow consistency that’s similar to their paychecks from work, employing a highly variable withdrawal strategy, especially with an equity-heavy portfolio, likely won’t be suitable. A spending strategy like the base case, or a dynamic strategy that modestly adjusts spending, will be a better fit.
Bequests: Do retirees wish to maximize consumption during their own lifetimes, including lifetime giving, or is leaving a healthy bequest to family or charity after death an equally important goal? Strategies that limit ongoing portfolio adjustments, especially the base case, will tend to lead to the highest end-of-life balances. That said, there are other, more straightforward ways to achieve similar aims. One would be to simply segregate a separate bequest portfolio from the spendable portfolio at the outset of retirement.
Use Case 4: To Arrive at a Holistic Retirement Income Plan
Finally, portfolio spending is just one piece of the retirement income puzzle. Most retirees will be able to rely on Social Security in addition to their portfolio withdrawals; a smaller subset will be able to rely on pensions. Still, other retirees may wish to generate income from an annuity, working in some fashion, or through real estate rental income. Those types of nonportfolio income sources can go hand in hand with portfolio withdrawals.
Delaying Social Security and/or purchasing some type of basic annuity helps enlarge lifetime spending and, importantly, provides a predictability in cash flows that portfolio withdrawals cannot. Moreover, that additional income will cover a retiree for life, providing a valuable longevity hedge for the retiree and spouse. Such strategies can work particularly well alongside a flexible approach to portfolio withdrawals.
At the same time, these strategies have the potential to shrink the amount of a portfolio that is available for heirs or charity at year 30. For example, delaying Social Security may necessitate higher early-retirement withdrawals, while steering a percentage of the portfolio into an annuity takes a chunk out of the portfolio early on. Both decisions reduce the opportunities for portfolio compounding even as they enlarge lifetime cash flows. For that reason, such strategies tend to be most valuable for retirees who wish to maximize their own consumption, which may include lifetime giving, rather than bequests at the end of life.