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Dispatches

Higher Fixed-Income Returns Boost Safe Withdrawal Rates

Morningstar’s study of retirement income showed a higher safe withdrawal rate in 2023 than previous years due to stronger fixed-income yields.

by Grace Malone | March 2024

Morningstar’s study of retirement income showed a higher safe withdrawal rate in 2023 than previous years due to stronger fixed-income yields.

For the annual study, Morningstar Investment Management develops forward-looking asset class return assumptions as well as assumptions about the expected volatility of each asset class and future inflation levels. Thirty-year forecasts are then extrapolated based on the assumptions.

The current highest safe withdrawal rate for a diversified portfolio over 30 years is 4% for portfolios with equity allocations of 20%–40%. The highest safe withdrawal rate was found to be 3.3% in 2021 and 3.8% in 2022. The research set 90% as the target success rate for the base case.

The “right” withdrawal rate depends on three key factors: the market environment of the retiree’s withdrawal period, the length of the withdrawal period and the asset allocation of the portfolio. Generally, portfolios that had a higher allocation to equity delivered higher returns, resulting in higher withdrawal rates than more conservative portfolios. However, the results varied widely depending on different market environments.

30-Year Starting Safe Withdrawal Rate %, by Asset Allocation, 90% Success Rate

These results underscore the point that the model’s base portfolio is conservatively created. However, the base case assumes that the investor’s spending needs are inflexible, steering the model toward fixed-income investments. Conservative asset mixes improve the starting safe withdrawal rates, although at the cost of future wealth: Lower equity portfolios recorded lower median returns at year 30 than portfolios with more equity exposure.

Source: “State of Retirement Income: 2023,” by Amy C. Arnott, Christine Benz and John Rekenthaler; Morningstar Portfolio Planning and Research, November 13, 2023.

Discussion

JOHN C from MA posted over 2 years ago:

Why are we hung up over IRA Rollover what we think may be an appropriate withdrawal rate when IRS Pub # 590 delineates minimum withdrawals ?? Whether we think 3.5% or 4.5% is appropriate is immaterial IRS requires geometrically ever increasing withdrawal rates as age 73 on up !!!. John


ROBERT A from NC posted over 2 years ago:

AAII should do a better job of educating young investors to make a 100% allocation to equities---and do that until retirement. With a reasonable amount of savings poured into such an allocation over 30 or 40 years, their asset growth would likely put them in a position to maintain that 100% equity allocation with a low burn rate throughout retirement.


JOHN L from NJ posted over 2 years ago:

If the 2023 retiree was following the conventional financial wisdom and slowly moving to 40% equity and 60% bonds prior to retirement; the higher interest rates in 2023 would be earned on a much smaller portfolio value as the value of his bond holdings were greatly reduced by the increase in interest rates. And this smaller portfolio value would offset the higher safe withdraw rate potentially resulting in lower annual withdraws.


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