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Higher Bond Yields Mean Retirees Can Pull a Bit More From Savings

Morningstar says retired workers can now safely withdraw 4% a year, up slightly from a 2022 analysis.


(Bloomberg) -- Retirees just got a raise. 

Well, not quite a raise, exactlyBut the percentage a retiree can safely withdraw annually from savings over 30 years, with a strong chance of not running out of money, got bumped up in Morningstar’s annual retirement income report, released Monday. It’s now 4%, up from last year’s 3.8%.

The uptick comes because “bond yields are higher, and we are relatively sanguine about [long-term] inflation,” said John Rekenthaler, director of research at Morningstar and one of the report’s authors.

For someone with a starting balance of $1 million looking for a steady stream of income akin to a yearly paycheck, that 4% rate means pulling $40,000 a year, an amount that would increase each year to account for inflation. 

The Morningstar analysis tested real-life returns and rates in 1,000 possible market environments to arrive at a withdrawal rate with a 90% probability of someone having funds left over after 30 years. 

That 4% is the highest safe withdrawal rate on a portfolio that holds 20% to 40% in stocks, 10% in cash and the rest in bonds. Morningstar uses that as its conservative base case, and then looks at what the safe rate would be for portfolios with other asset mixes.

The 30-year return forecast for US investment-grade bonds is now 4.93%, up from 4.51% last year, according to Morningstar Investment Management, while the projected long-term inflation rate is 2.42%, down from 2.84%. Meanwhile, the long-term forecast for large US growth stocks dropped to 8.64% from last year’s 9.65%. 

If a portfolio has 70% in stocks, the safe withdrawal rate goes down to 3.8%, but that person will have a higher median ending balance after the end of 30 years than the person with a bond-heavy portfolio. 

“We don’t want to scare people away from having a higher level of stocks in portfolios,” said Rekenthaler.

Aside from how long a person pulls from a portfolio, and their asset allocation, a third key variable is the market environment when a retiree is drawing on that money, the report noted. While the highest safe withdrawal rate over rolling 30-year periods from 1926 through 1993 for a portfolio 75% in stocks was 6.7%, in tough markets the lowest safe rate was just 2.7%.

A 4% withdrawal rate is already a popular guideline used as a starting point in planning how much to safely take from portfolios in retirement. A safe percentage can be higher — maybe 5% — but only if a retiree is willing to do things like lower the percentage withdrawal in down markets, or to forego annual inflation adjustments.

Morningstar’s analysis noted that studies of real-life spending in retirement show that “retirees often decrease their inflation-adjusted spending over time, a pattern that can also lead to considerably higher safe withdrawal rates.” 

To contact the author of this story:
Suzanne Woolley in New York at [email protected]

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