When Morningstar in 2021 pegged a 30-year safe withdrawal rate for retirees at 3.3%, it triggered a shudder across the retirement planning industry. Was the annual safe withdrawal rate of 4%, the industry standard since its debut in 1994, not so safe after all?

Heated arguments ensued.

“It turned out the timing was splashy, but that’s not why we put it out,” says John Rekenthaler, director of research at Morningstar, of the 3.3% figure released in December 2021—on the heels of a whole lot of post-pandemic market volatility.

“For one thing, we didn’t know before we read the numbers that it would be that low. But we’d been talking and writing about retirement income for a while, and we said, ‘You know, we should do more of a formal paper on it,’” he says. “It wasn’t like we said, ‘Oh man, things have gotten worse, the public needs to know about it.’”

And—good news!—the percentage is no longer that low, as the higher bond yields of the last year and a lowered inflation estimate going forward have changed the outcome over a 30-year horizon, and in mid-November Morningstar released its new number.

The firm now projects the annual safe withdrawal rate for retirees today to be at … 4%. That’s what Michael Kitces, an industry consultant, expert in retirement income planning and a vocal defender of the 4% rule, had been saying all along.

“It’s the ‘4% rule’ because that’s the safe withdrawal rate that would stand up to the worst 30-year markets in history. That was the research behind it,” Kitces says. “That covers environments like the 1970s that had double-digit inflation for almost a decade. We got upset because inflation got really high last year for a few months. That covers the Great Depression. And as bad as the financial crisis was, it was nowhere near the impact of the Great Depression. Even in those environments, the 4% rule worked.”

When publishing the original 3.3% figure, Rekenthaler had argued that the specifics of 2021 made it worth taking another look at the concept of a safe withdrawal rate using forward projections for the data points, not historical data.

But what was missed in that report, Rekenthaler admits, was the reason that a safe withdrawal rate needs to be established in the first place—it is the first line of defense against sequence-of-returns risk.

And that risk, sources say, looms large.

Predicting Sequence-Of-Returns Risk
This is the phenomenon that occurs when a retiree’s portfolio is subjected to low returns early in the drawdown period and for long enough that it never recovers, potentially leaving the retiree years short on assets.

Kitces says one thing advisors often get wrong about sequence risk is that the risk doesn’t lie in just a couple of bad years of returns right when a client retires. “Sequence-of-returns risk, it turns out, is mostly about what happens in the first decade after retirement, magnified,” he explains, adding that while clients should fear a market crash early in retirement they also should fear volatility and a slow recovery or an extended period of low returns. “If the first decade is really bad, if you’re not doing something to defend against that bad decade, whatever assets you have slowly run out and you eventually have a problem,” he says.

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