The “4% rule,” which says retirees can safely draw down 4% of their assets annually, with an annual increase for inflation, and have enough to last 30 years if they stay invested in a 60% stock/40% bond portfolio, often comes under fire for being fixed in place no matter what the economic environment is.

After all, it was devised in 1994 by financial advisor William Bengen, and a lot has happened since then—bursting bubbles and the global financial crisis, followed by the great recession. Then the Covid pandemic. Investors are also living longer and face the risk of market plunges early in their retirement, from which it’s harder to recover losses (a problem called the “sequence of returns” risk).

But Christine Benz, Morningstar’s director of personal finance, has a plan for pre-retirees who want to feel confident in their ability to retire with the longevity of their assets in mind.

Building on the 4% rule, Benz says that if today’s retiree is willing to be flexible about their retirement spending, doing what she calls “dynamic spending,” they could in some years take much more, though in other years they would take less.

To show how that would work, in 2021 Morningstar’s research team augmented Bengen’s work by incorporating current economic climates, particularly recent interest rates, equity valuations and inflation, to create a more sensitive initial safe withdrawal rate.

The results of that work suggest that in 2021 new retirees would not have started with a 4% withdrawal but with 3.3%. From there, they would follow the other components of the 4% rule—increasing the withdrawal annually to reflect inflation and keeping the remaining assets in a balanced portfolio.

Retirees in 2022 could start higher, at 3.8%, and in 2023, Morningstar’s safe withdrawal rate returned to 4%, converging with Bengen’s findings. In other years, it could be much higher, such as 4.8% or 5.2%, depending on a host of variables, Benz said.

What retirees need to know, she added, is that a dynamic withdrawal system can elevate lifetime withdrawals without compromising safety, as long as the retiree is willing to cut back on spending when required.

“We've very much concluded that to the extent that people can be flexible about their retirement spending and pay attention to what's going on in their portfolio balance, that redounds to the benefit of higher lifetime spending,” she said, referring to the research her team has been doing at Morningstar to zero in on what a safe withdrawal rate means in 2024.

Morningstar will soon release a suggested safe withdrawal figure for 2024, Benz said, adding that current market conditions play a huge role in portfolio longevity, as do future unknowns. All of which make predicting a safe withdrawal rate that goes beyond the plug-and-play of a flat 4% extremely tricky.

“Unfortunately, we're very much beholden to what yields are looking like at the time when we retire, what inflation looks like, and what equity valuations look like,” she said, adding that asset allocation also plays a role, with a balanced portfolio being much more effective over the long term than a heavy-equity portfolio trying to squeeze more dollars out of the market.

“It can be difficult to predict these cycles, and I think most people here would acknowledge it’s not worth bothering,” she said to an online assembly of advisors and investors attending her virtual seminar, “5 Must-Knows About In-Retirement Spending.”

In addition to yields, inflation and valuations, other wild cards are the retiree’s own spending trajectory (Which means asking: Where are they in the “go-go, slow-go, no-go” graph?) Another variable is the uncertainty about their retirement date and, of course, how long they will live.

“All of these factors together nicely illustrate, perhaps painfully illustrate, what a complicated problem this is,” Benz said. “If we don't know these variables, it's difficult to know how much you could reasonably spend over your retirement drawdown period.”

It’s far more useful to focus on what advisors do know, she said, and use that data to create the best, most responsive retirement income plan possible.

(This is Part 1 of a two-part article. The next installment will delve into Benz’s five must-knows of retirement spending.)