Should advisors adjust their clients' retirement withdrawals based on the ups and downs of the market?
The answer is a qualified but sometimes resounding yes, according to new research from Morningstar, which finds that building out a more a disciplined market-driven approach for clients’ retirement withdrawals can lift both starting and lifetime withdrawals.
There are, of course, trade-offs associated with flexible withdrawal systems versus those that deliver steady cash flows, Christine Benz, Morningstar's director of personal finance, said in a new blog.
Benz’s discussion comes on the heels of Morningstar’s release in mid-November of a study that came to the “uncomfortable conclusion” that retirees who want a predictable income with a high degree of certainty around not running out, should keep their spending down, she said.
Rather than the 4.0% withdrawal rate that is often cited as the safest, Morningstar found that a 3.3% starting withdrawal amount is likely to be sustainable for balanced portfolios over a 30-year time horizon.
That's sobering, but there’s more to the story, said Benz, who added that even modest tweaks to the withdrawal system can help elevate starting withdrawal amounts.
“For example, taking fixed real withdrawals but simply forgoing an inflation adjustment following a losing portfolio year resulted in a 3.76% starting withdrawal rate for a balanced portfolio,” she added.
At the same time, truly flexible withdrawal strategies such as the guardrails strategy, which was developed by financial planner Jonathan Guyton and computer scientist William Klinger, can increase starting and lifetime withdrawals even more, Benz said.
Here’s how it can work. “By cutting back on withdrawals in down markets but allowing retirees periodic raises in good ones, the guardrails method supported a starting safe withdrawal rate of 4.72%—above the 4% guideline,” Benz said.
Depending on the variable method an advisor chooses to use for client portfolio withdrawals, Morningstar found that they can provide a little or a lot of lift a client’s baseline withdrawals.