There’s been an ongoing debate about whether retirees should abandon the “4% rule” for withdrawals from retirement accounts, a retirement income rule of thumb for decades. The market volatility of recent years made that rule suspect for many new retirees, but a new study from Morningstar finds that the rule can still apply.
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What Is the 4% Rule?
Created in 1994 by a financial planner named William Bengen, the 4% rule posits that retirees can make a well-structured retirement fund last 30 years by withdrawing no more than 4% of the balance in the first year of retirement, then adjusting subsequent withdrawals for inflation. Bengen’s research was based on each 30-year period of market returns and conditions dating back to 1926. He found that even during the worst three decades for markets – a stretch from October 1968 to 1998 – a retiree wouldn’t run out of money.
The popularity of the rule has fluctuated, and the strategy comes with some associated criticism. That’s because during down markets the sequence of returns risk can come into play, which occurs when the first years of withdrawals take place when the value of the retirement portfolio is down. Earlier this year, personal finance expert Suze Orman argued that the rule no longer made sense and that retirees should prolong working and withdraw as little money as possible, but no more than 3%.
How Morningstar’s Study Factors In
The investment analysis firm Morningstar has examined the safe rate of withdrawal for the first year of retirement for a few years running. Morningstar’s newest research finds that with the partial recovery of stocks, withdrawing up to 4% is once again a safe starting point.
“I estimate that retirees drawing down income from an investment portfolio can now afford to withdraw as much as 4.0% as an initial spending rate, assuming a 90% probability of still having funds remaining after a 30-year time horizon,” writes Morningstar portfolio strategist Amy C. Arnott, CFA.
Morningstar’s research on the optimum initial safe withdrawal rate started in 2021 when the analysis recommended a 3.3% withdrawal rate. For 2022, that rate increased to 3.8%. The research assumes a 90% chance of success for a portfolio where stocks make up 20% to 40% of the holdings. At the end of 30 years, the portfolio would still have value.
The big factor in this year’s assessment was a change in the estimate for long-term inflation that fell to 2.42% this year against 2.84% in 2022, along with improvements in returns on fixed-income investments, such as bonds and cash accounts. The projected 30-year fixed-income returns (including cash) increased from 4.44% in 2022 to 4.81% in 2023. The study noted that while the performance of stocks has improved so far this year, the projected 30-year returns on stocks decreased this year, slipping to 9.41% from 9.88% in 2022.
The study notes that retirees who take a more flexible approach to withdrawals than a strict rate of 4% adjusted annually for inflation could be able to withdraw more money at the beginning of retirement when retirees often spend more money as they establish a new retirement lifestyle. Those retirees would need to accept that their cash withdrawals would fluctuate from year to year and that they might have less money left after 30 years.
Bottom Line
The popularity of the 4% rule comes and goes but it can be a good starting point for creating a safe strategy for retirement withdrawals. An important consideration is how much money is withdrawn in the first years of retirement, especially if the portfolio has lost value.
Retirement Planning Tips
- A financial advisor can help you build an income plan for retirement. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Social Security plays a significant role in most people’s plans for retirement. SmartAsset’sSocial Security calculatorcan help you estimate how much your benefits will be worth based on when you plan to claim them.
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FAQs
How Morningstar's Study Factors In. The investment analysis firm Morningstar has examined the safe rate of withdrawal for the first year of retirement for a few years running. Morningstar's newest research finds that with the partial recovery of stocks, withdrawing up to 4% is once again a safe starting point.
What is the 4% rule for Morningstar? ›
Researcher Bill Bengen developed that rule of thumb back in 1994, meaning an annual withdrawal rate of 4% is the amount that will see investors through retirement in any economic scenario. (Check out our interview with Bengen to hear how he thinks that rule has held up in today's market environment.)
Is the 4% withdrawal rule still valid? ›
The 4% rule comes with a major caveat: It's not really a “rule” since everyone's situation is different. If you have a large retirement investment portfolio, you might not need to spend 4% of it every year. If you have limited savings, 4% might not come close to covering your needs.
Is the 4% retirement rule making a comeback? ›
Ivanna Hampton: New retirees could kick off their golden years with a familiar number, 4%. A trio of Morningstar researchers analyzed starting safe withdrawal rates from an investment portfolio to fund retirement. The future looks good, and a little flexibility could make it even better.
What is the 4 rule and safe withdrawal rates in retirement? ›
The 4% rule is a popular retirement withdrawal strategy that suggests retirees can safely withdraw the amount equal to 4% of their savings during the year they retire and then adjust for inflation each subsequent year for 30 years.
What's a safe withdrawal rate for retirees Morningstar? ›
Time Horizon
While generally not regarded as a desirable solution, expiring quickly does permit retirees to follow Ramsey's advice. Even with Morningstar's conservative assumptions, investors can safely withdraw almost 10% annually, inflation-adjusted, over a 10-year period.
Is Morningstar worth it? ›
In the crowded world of investment analysis, Morningstar stands out as one of the best-known and well-respected providers. It's especially useful for mutual funds and ETFs, thanks to its five-star rating system.
How many people have $1,000,000 in retirement savings? ›
However, not a huge percentage of retirees end up having that much money. In fact, statistically, around 10% of retirees have $1 million or more in savings. The majority of retirees, however, have far less saved.
How long will $400,000 last in retirement? ›
Safe Withdrawal Rate
Using our portfolio of $400,000 and the 4% withdrawal rate, you could withdraw $16,000 annually from your retirement accounts and expect your money to last for at least 30 years. If, say, your Social Security checks are $2,000 monthly, you'd have a combined annual income in retirement of $40,000.
How long will $500,000 last in retirement? ›
Yes, it is possible to retire comfortably on $500k. This amount allows for an annual withdrawal of $20,000 from the age of 60 to 85, covering 25 years. If $20,000 a year, or $1,667 a month, meets your lifestyle needs, then $500k is enough for your retirement.
The 4% rule and Social Security
You may be wondering how you include your future Social Security income in this equation, and the simple answer is, you don't. It wasn't designed to take that into account.
What is a safe withdrawal rate for age 70? ›
We did the math—looking at history and simulating many potential outcomes—and landed on this: For a high degree of confidence that you can cover a consistent amount of expenses in retirement (i.e., it should work 90% of the time), aim to withdraw no more than 4% to 5% of your savings in the first year of retirement, ...
Will I lose my retirement in a recession? ›
Your 401(k) can recover after a recession if you give it enough time to regain losses. Historically, the stock market has always recovered from recessions to eventually reach new highs. In fact, your 401(k) may begin to recover before the recession ends.
What is the average 401k balance for a 65 year old? ›
What percentage of people retire with $2000000? ›
Among the 47 million households headed by someone age 60 or older, 7% had household investable assets of at least $2 million, Drinkwater said. Only 6% of the 89 million households in the U.S. headed by someone 40 to 85 years old has that amount, Drinkwater said.
How long will $1 million last in retirement? ›
Around the U.S., a $1 million nest egg can cover an average of 18.9 years worth of living expenses, GoBankingRates found. But where you retire can have a profound impact on how far your money goes, ranging from as a little as 10 years in Hawaii to more than than 20 years in more than a dozen states.
What is the golden rule of Morningstar? ›
Determine Your Golden Ratio
Your Golden Ratio is made up of three numbers, representing the percentage of your gross income that goes to: The Past—Paying for things you bought/did in the past. The Present—Funding your current lifestyle. The Future—Accumulating to create future income.
What is the 4 rule in investing? ›
The 4% rule states that you should be able to comfortably live off of 4% of your money in investments in your first year of retirement, then slightly increase or decrease that amount to account for inflation each subsequent year.
What are Morningstar 4-star rating funds? ›
Funds whose risk-adjusted returns fall within the top 32.5% relative to category peers receive a 4-star rating. Subscribe to Morningstar Investor to get the full picture of an ETF's potential.
What is the criteria for Morningstar? ›
The Morningstar risk rating is a ranking given by research firm Morningstar to publicly traded mutual funds and exchange traded funds (ETFs). A score of 5 is given to the best risk performers, with a 1 to the worst. Morningstar ratings are based on the fund's historical performance compared to other like funds.
