Morningstar - Q1 2023 - 40

Strategies
the way many retirees actually spend. A fixed
real withdrawal strategy, whereby retirees
withdraw X% of their portfolio in the first year and
then inflation-adjust the dollar amount thereafter,
provides a steady " paycheck equivalent "
for the duration of retirement. Yet actual retiree
EXHIBIT 1
Better Outlook After a down year, Morningstar Investment Management raised
its long-term returns projections. Inflation is also projected to be higher.
Projected 30-Year Asset-Class Return % and Inflation Assumptions
Broad Asset Class
Equity
Asset Class
U.S. Large Growth
U.S. Large Value
U.S. Small Growth
U.S. Small Value
Foreign
Bond
Cash
Inflation
Source: Morningstar Direct. Data as of Dec. 31, 2022.
EXHIBIT 2
Safe Start For a 30-year retirement, a starting withdrawal rate of 3.8% will
likely sustain a balanced portfolio.
Projected Starting Safe Withdrawal Rate %, by Asset Allocation and Retirement Time Horizon
Equity Weighting (%)
100
90
80
70
60
50
40
30
20
10
Balanced portfolios provide
the highest initial safe
withdrawal rates across
time horizons.
10 Years
8.5
8.7
8.9
9.1
9.3
9.5
9.6
9.7
9.7
9.7
9.4
Source: Morningstar Direct. Data as of Dec. 31, 2022.
15 Years
5.9
6.1
6.2
6.3
6.5
6.6
6.7
6.7
6.7
6.6
6.4
20 Years
4.7
4.9
4.9
5.1
5.2
5.2
5.3
5.3
5.2
5.1
4.8
25 Years
3.9
4.0
4.1
4.2
4.3
4.3
4.4
4.3
4.3
4.1
3.9
30 Years
3.5
3.6
3.7
3.7
3.8
3.8
3.8
3.8
3.7
3.5
3.3
35 Years
3.3
3.3
3.3
3.4
3.4
3.4
3.4
3.4
3.3
3.1
2.9
40 Years
3.1
3.1
3.1
3.2
3.2
3.2
3.2
3.1
3.0
2.8
2.6
gForgo inflation Begins with the fixed real
withdrawals throughout a 30-year horizon.
However, to preserve assets after down markets,
the retiree skips the inflation adjustment
in the year after a year in which the portfolio
has declined in value.
gGuardrails Sets an initial withdrawal percentage,
then adjusts subsequent withdrawals annually
based on portfolio performance and the previous
withdrawal percentage. Financial planner
Jonathan Guyton and computer scientist William
Klinger developed this strategy.
gRequired minimum distribution Divides
the portfolio value by life expectancy as of the
preceding year-end.
Our research, shown in EXHIBIT 3, found that all of
these strategies elevated starting and lifetime
withdrawal rates (the average portfolio withdrawal
rate over a 30-year horizon) relative to the fixed
real spending strategy we used as our base case.
40
Morningstar Q1 2023
U.S. Investment-Grade
Foreign
U.S. Treasury Bill
2021
6.25
7.97
10.17
10.53
8.41
2.68
2.81
1.43
2.21
2022
9.65
8.96
10.58
12.40
10.00
4.51
5.12
2.69
2.84
spending shows a different pattern. Research
from David Blanchett, formerly of Morningstar and
now at PGIM, demonstrated that retirees
often spend the most in the early years of
retirement, then gradually reduce spending. They
might elevate spending again in the later
years of retirement to pay for higher healthcare
costs, especially long-term care.
The net effect of that pattern, Blanchett found,
is that retirees don't spend in line with
inflation-they increase their spending roughly
1 percentage point less per year than the
inflation rate, on average. Thus, in 2022's research,
we modeled an alternative scenario with an
inflation adjustment of 1.8% annually (versus
2.8% in our base case). The net effect of
that ongoing inflation haircut to real withdrawals,
predictably, is that the safe starting withdrawal
rate jumped to 4.3% for a balanced portfolio
over a 30-year period with a 90% success
rate ( EXHIBIT 3 ). The trade-off, however, is that
lifetime withdrawal rates decreased relative
to a fixed real withdrawal system-not surprising,
given the reduction in inflation adjustments.
Dynamic Withdrawal Strategies
As we did in 2021's paper, we tested a variety of
additional flexible withdrawal strategies:
g10% reduction Employs a schedule of fixed real
withdrawals but makes 10% downward
adjustments in years after investment losses.

Morningstar - Q1 2023

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