Retirees just got a raise.
Well, not quite a raise, exactly. But the percentage a retiree can safely withdraw annually from savings over 30 years, with a strong chance of not running out of money, got bumped up in Morningstar’s annual retirement income report, released Monday. It’s now 4%, up from last year’s 3.8%.
The uptick comes because “bond yields are higher, and we are relatively sanguine about [long-term] inflation,” said John Rekenthaler, director of research at Morningstar and one of the report’s authors.
For someone with a starting balance of $1 million looking for a steady stream of income akin to a yearly paycheck, that 4% rate means pulling $40,000 a year, an amount that would increase each year to account for inflation.
The Morningstar analysis tested real-life returns and rates in 1,000 possible market environments to arrive at a withdrawal rate with a 90% probability of someone having funds left over after 30 years.
That 4% is the highest safe withdrawal rate on a portfolio that holds 20% to 40% in stocks, 10% in cash and the rest in bonds. Morningstar uses that as its conservative base case, and then looks at what the safe rate would be for portfolios with other asset mixes.
The 30-year return forecast for US investment-grade bonds is now 4.93%, up from 4.51% last year, according to Morningstar Investment Management, while the projected long-term inflation rate is 2.42%, down from 2.84%. Meanwhile, the long-term forecast for large US growth stocks dropped to 8.64% from last year’s 9.65%.
If a portfolio has 70% in stocks, the safe withdrawal rate goes down to 3.8%, but that person will have a higher median ending balance after the end of 30 years than the person with a bond-heavy portfolio.
“We don’t want to scare people away from having a higher level of stocks in portfolios,” said Rekenthaler.