Morningstar, a financial services firm and a trusted name in retirement planning, offers guidance that differs from the famous 4% withdrawal rule. We took a look at research on that strategy to see how it panned out.
The firm publishes an annual report, “The State of Retirement Income,” which includes its own strategy for a safe withdrawal rate.
The report, which began in 2021, has a history of challenging conventional wisdom, including the 4% rule devised by financial adviser William Bengen in 1994. It holds that retirees can begin with a withdrawal rate of 4% of their balance and adjust for inflation each year to have a good chance of their money lasting through retirement.
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Unlike Bengen’s research, which reviewed data back to 1926, Morningstar’s research is forward-looking. It has, in recent years, resulted in retirees being advised to withdraw less than 4% to reduce their risk. This included research published in 2021 that recommended a 3.3% safe withdrawal rate, and in 2024, when 3.7% was considered the optimal rate.
For retirees who are uncertain about how much they can withdraw from their portfolios, this Morningstar guidance — which takes into account future events — could be an invaluable guidepost if it were proven to work.
That’s why it’s so exciting to see that Morningstar has now put its research to the test, with the goal of evaluating whether its past advice has panned out.
Has the financial services firm given retirees good advice, or did analysts steer retirees wrong in suggesting a more conservative amount to withdraw?
Did Morningstar steer retirees wrong?
To put Morningstar to the test, researchers looked at whether the 2021 recommendation to stick to a 3.3% withdrawal rate had panned out. They tested a hypothetical retiree’s $1 million portfolio performance, with the test portfolio presumed to be invested in an appropriate mix of U.S and international stocks, bonds and cash.
The research revealed that the more conservative approach would have paid off for those who retired at the start of 2022, as double-digit losses and inflation in 2022 resulted in major declines in portfolio value. Specifically:
Retirees who followed the 4% rule would have seen their portfolio balance decline to $773,000 after withdrawals made at the start of 2023 and rebound to $934,000 by 2024. If they continued to follow the 4% rule and adjusted withdrawals due to inflation, they’d be withdrawing $45,000 per year now or 4.85% of their balance.
Retirees who followed the 3.3% rule would have seen their portfolio balance dip to $786,000 after 2023 withdrawals and bounce back to $960,000 by 2024. Their current inflation-adjusted withdrawal rate would be 3.89%, giving them $37,357 to spend this year.
While retirees in the first group who followed the 4% rule would have more to spend now, Monte Carlo simulations predict just a 72.30% success rate for this group, compared with a 91.80% chance of their money lasting for the group that followed Morningstar’s guidanc
Should you follow Morninstar’s advice for your withdrawal rate?
Obviously, every retiree would prefer to have around a 92% chance of having their money last compared with a 72% chance. There’s a solid argument to be made that Morningstar was 100% right, and retirees should have listened to the analyst’s suggestions and chosen the more conservative rate years ago.
Of course, there are many factors that go into choosing a safe withdrawal rate — including your goals for retirement.
The first group that followed the 4% rule has had more money to spend during a turbulent period, and some seniors would accept that as a tradeoff for having a lower chance of future retirement success.
The 2022 to 2025 period was also a time of exceptionally high inflation, so if the increase in their withdrawal amount slows over time, retirees in the 4% group might not fare so badly in the end.
Retirees also need to follow RMD rules, which might conflict with both the 4% rule and with Morningstar’s guidance. As a result, seniors could face more limited choices in how much they withdraw from traditional retirement accounts.
Ultimately, the best approach is generally going to be to create a personalized retirement withdrawal plan, based on account balances, investment risk, health status and household budget, to have the best retirement possible both now and in the future.
Retirees can get help from a financial adviser if they aren’t sure how to do that, and making that investment in professional advice might be worth it rather than simply following a number chosen by analysts online — even if the evidence does suggest their initial advice was rock solid.
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