4% Rule: Rumors of my death have been greatly exaggerated

The 4% rule, which states that you can safely withdraw 4% of your retirement savings each year and adjust for inflation, has been the gold standard for retirees asking how to make their money last until they die. However, with the Fed holding interest rates artificially low for years, the rule has been put into question with some stating it should be 3% or even lower. Now, Morningstar is telling retirees that “The 4% rule may finally hold true as a safe starting withdrawal rate when considering a 30-year time horizon.” This is the firm’s highest safe withdrawal percentage since it started the research in 2021. The firm’s findings suggest that new retirees using the rule have a 90% probability of still having funds remaining after the 30-year period.

What is the driving force behind this change? With the rise in yields for bonds and cash, the future projections for portfolio returns have improved, Morningstar said. Consequently, the potential safe withdrawal amounts for new retirees over a 30-year span have gradually increased. Additionally, a more restrained inflation forecast of 2.42% this year, compared to 2.84% in 2022, has contributed positively to these developments.

This year’s research from Morningstar indicated slightly lower anticipated 30-year returns for stocks compared to the previous year – a decline from 9.88% to 9.41% for an all-equity portfolio – simultaneously, the expected returns for fixed-income assets (including cash) increased from 4.44% to 4.81% in 2023. Additionally, the more moderate inflation predictions also contributed positively, with their 30-year inflation forecast dropping to 2.42% from 2.84% in 2022.

“… we estimate that a new retiree planning for a 30-year time horizon can safely withdraw as much as 4% of the portfolio’s value as a starting safe withdrawal rate for a portfolio with a 40% equity weighting. Because of the more attractive yields available on fixed-income securities, we found the same figure applies to portfolios with equity weightings as low as 20%,” Morningstar said.

Navigating retirement drawdown strategies is a complex realm within finance, posing significant challenges. Yet, retirees benefit from a myriad of options. The ideal level of flexibility in spending hinges on several factors: preferences for consistent income, maximizing withdrawal rates, leaving an inheritance, and the coverage of fixed expenses by nonportfolio income. With the 4% rule back on the table, it could provide future and current retirees with some much-needed breathing room.

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