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Generally, these call for lesser withdrawals after years of negative portfolio returns.įor example, retirees can forgo inflation adjustments in those years they may also choose to reduce their typical withdrawal by 10%, and revert to normal once investment returns are again positive. Retirees have a few options in this regard to ensure the longevity of their investments, according to Morningstar. But that might not be a fair assumption - research shows that seniors generally fluctuate their spending through retirement. Perhaps most significantly, the rule assumes one's spending doesn't adjust according to market conditions. (A 65-year-old today will live another 20 years, on average.) Retirees comfortable with more risk (i.e., a lower probability of success) or who think they won't live into their 90s may be able to safely withdraw larger amounts of money each year. For example, it uses a 90% probability that seniors won't run out of money over a 30-year retirement. Retirees who delay claiming Social Security to age 70, for example, will get a higher guaranteed monthly income stream and may not need to lean on their investments as much.įurther, the rule of thumb uses conservative assumptions. It doesn't account for non-portfolio income sources like Social Security or pensions. Of course, there are ample caveats to this analysis of the 4% rule.įor one, the 4% rule (and the updated 3.3% rule) only consider one's portfolio investments.
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That's because there's less runway for the portfolio to grow once the investments rebound. Taking too large a withdrawal from one's nest egg in the first year or years - especially from a portfolio that's declining in value at the same time - can greatly increase the risk of running out of money later. Investment returns are especially important in the early years of retirement due to so-called sequence-of-returns risk. (While inflation has been historically high in recent months, Morningstar expects it to moderate over the long term.) The analysis concedes that this result is likely though not inevitable. The dynamic has perhaps lulled near-retirees into a false sense of security, Benz said.īonds are "highly unlikely to enjoy strong gains over the next 30 years," and high stock prices are likely to fall as they revert to the average, according to the report.
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Low inflation, low bond yields (which have boosted bond prices) and strong stock returns have helped buoy investment portfolios and safe withdrawal rates, she said. Retirees have enjoyed a "trifecta" of positive market developments over the past several decades, according to Christine Benz, the director of personal finance and retirement planning at Morningstar and a co-author of the new report.