Morningstar Inches Closer to 4% with 3.8% Safe Withdrawal Rate

MikeM

For me, the change in the rate more so than the actual percentage from this study instils the fact it does matter where in the market cycle you start your retirement.

https://401kspecialistmag.com/morningstar-inches-closer-to-4-with-3-8-safe-withdrawal-rate/

Morningstar has risen its safe withdrawal rate to 3.8%, a stark increase from last year’s 3.3%, according to its latest annual model.

As in their 2021 study, Morningstar analyzed rates using a conservative base portfolio of 50% stock/50% bonds for new retirees with a 30-year retirement horizon and a 90% probability of success, finding that as stocks and bonds improve next year, so will the safe withdrawal rate.

Sven

Forecasting market return is challenging. Some of M* assumption are a bit off. CPI remains elevated and Nov 2022 is at 7.1%, far from the 2,2%. This year the broader bond index, BND, is down -13% in 2022. It will take a few year for bonds to normalize back to 3-5% range.

According to Morningstar Investment Management, the 30-year outlook for various stock categories ranged from 9% to 12% in this year’s research. Expected bond returns rose from 3% to 5%, and of course, inflation expectation jumped from 2.2% in 2021 to 2.8% in 2022.

yogibearbull

Direct link to M* article that also shows that allocation/balance works best vs all stocks or bonds,
https://www.morningstar.com/articles/1128840/whats-a-safe-withdrawal-rate-today

larryB

Morningstar and I believe Bengen both used a 50/50 stock bond asset allocation. Maybe I am too risk adverse but I wonder if most new retirees have half of their investments in equities ? I heard an interview with Bengen earlier this year and he had taken some risk out of his portfolio. I am guessing that the research is not based on attempting to time the market with all the risks that would bring.

Observant1

Excerpt from The Long View podcast episode (published 12/14/2021) featuring Mr. Bengen.

Benz: How about the reverse of that where you believe that equity valuations are notably scary? Would it be advisable to potentially take the equity weighting way down with the assumption that you would ramp it up later on?

Bengen: Yes. And essentially, that's what I'm doing in my portfolio. I'm only about 20% equities right now, because I think evaluations are ridiculous. And if you look at the chart of the CAPE, you'll see that when it reaches these peaks, in 1929, and it did so in the mid-60s, and then around 2000, that there was a sharp decline from that. It may take a number of years for it to happen. But it has always happened historically, and I don't know why this would be any different, the current environment. I just can't predict when it will happen. It will be six months, two years, who knows. But I'm a believer that the mean reversion--if we don't have mean reversion, it means we're in a whole new era and that the historical data doesn't mean really that much. So, I guess we'll have to wait and see.

Link

sfnative

Methodology is suspect, imo, if the safe withdrawal rate is going to change every year. That was the point of Bengen's rule, it didn't fluctuate.

Sven

I tend to agree with your assessment. It is challenging to stay with the 4% rule since many folks investors are having double digit loss this year. It is a question for them if they can afford to or not?

davidrmoran

12/21, one year ago