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Using Guardrails For The 4 % Rule
After Morningstar came up with a new number in 2021 , two divergent opinions about the safe withdrawal rate have now reconciled . By Jennifer Lea Reed
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 ,
54 | FINANCIAL ADVISOR MAGAZINE | DECEMBER 2023 WWW . FA-MAG . COM