Morningstar - Q1 2022 - 7

Letter From the Editor
Weighing Withdrawals
Jerry Kerns
In our last issue, we explored how adding a
high-quality guaranteed-income product
could help solve many retirement-income issues,
such as longevity risk, sequence of returns,
and stability ( " Safe and Sound, " Page 35, Q4 2021).
In this issue, we tackle the retirement-income
challenge from a different angle: safe
withdrawal rates. After investors have saved
up a lifetime of earnings for their retirement nest
egg, calculated their spending needs during
their retirement, and considered other sources
of income (such as the aforementioned annuities),
how much can they safely take out every
year without worrying about depleting their
portfolio too quickly?
For decades, the rule of thumb in the financial
advice industry has been a fixed 4% rate at
the start of retirement (and then annually adjusted
for inflation). But based on their recent research,
Morningstar's Christine Benz, Jeffrey Ptak,
and John Rekenthaler urge financial advisors and
their clients to reconsider. In " New Mix for
Retirement " (Page 29), the authors argue that
future retirees will need to lower their withdrawal
rates, at least initially. This change is necessary,
they say, because what worked in the past
is unlikely to work in the future. The past 30 years
have seen booming stock market returns and
benign inflation-a perfect economic environment
to retire into. We're unlikely to experience the
same conditions over the next 30 years. Therefore,
retirees should expect to take out less than
prior generations.
This will be disheartening news for many savers,
but the authors offer a pick-me-up. In " Lower
Withdrawals? No Problem " (Page 35), they say that
if retirees are willing to adapt their withdrawal
amounts to market conditions each year
throughout their retirement, they should be fine.
" Taking lower withdrawals in weak market
environments and higher ones in very strong ones
goes a long way to supporting higher lifetime
morningstar.com/products/magazine
7
withdrawals, " they write. The authors tested four
such flexible strategies, using projected
market returns and inflation rates, and found
that although the methods offer a variety
of results, each can help make portfolios last
an entire retirement in a relatively tough market
environment-while allowing retirees to
avoid drastically changing their lifestyle, even
under the toughest conditions.
Sound too good to be true? There are downsides,
of course. These withdrawal methods are not
" set it and forget it. " They require yearly
adjustments and a hands-on approach, and the
withdrawal rates may vary significantly. This is
where financial advisors have an important
role to play. The fixed 4% rule might have been
sufficient in the past, but new, and future,
retirees will not only need to be coached on how
to be flexible; they will also need to be reassured
that their plans are working through the
market's ups and downs and other economic
challenges that we anticipate will occur in
the decades to come. Advisors are in a position
to offer both.
http://www.morningstar.com/products/magazine
Morningstar - Q1 2022

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