How retirees can safely withdraw more from savings—and not run out of money

From Gen Z to baby boomers, one of workers’ darkest fears about retirement is outliving their money. So figuring out just how much to pull from retirement accounts for living expenses each year is, well, unnerving. You get it wrong, and the aftermath is bone-chilling.

But here’s some good news.

According to a Morningstar Inc. recommendation released this week, a new retiree can safely withdraw 4% of retirement savings annually over the next three decades without emptying the till. That’s the highest safe withdrawal percentage since Morningstar began creating this research in 2021. Last year, it was 3.8% and 3.3% in 2021.

The new withdrawal rate is based on a conservative retirement savings portfolio that consists of 20% to 40% in stocks, 10% in cash, and the rest in bonds with a 30-year time horizon, according to the researchers.

Read more: How much money do you need to retire?

Why the raise for retirees this year?

“Higher bond yields make everything easier for retirees and help explain why our highest safe withdrawal percent corresponds with portfolios that have just 20% to 40% equity,” Morningstar’s personal finance director and co-author of the research, Christine Benz, told me.

Otherwise, investing a higher percentage of your retirement portfolio in stocks will ding you in their calculations. If you have 70% in stocks, the safe withdrawal rate goes down to 3.8%, according to the data.

“Higher bond yields make everything easier" (Getty Creative)“Higher bond yields make everything easier" (Getty Creative)

“Higher bond yields make everything easier” (Getty Creative) (ImagineGolf via Getty Images)

By the numbers

The anticipated 30-year returns for stocks were slightly lower in this year’s research compared with the previous year, with projected returns for an all-equity portfolio sliding down to 9.41% from 9.88% in 2022. Meanwhile, expected fixed-income returns (including cash) edged up to 4.81% from 4.44% in 2022.

“Taking less investment risk makes sense for retirees who are seeking a high degree of certainty and consistency in their annual cash flows with a 90% probability of not running out of funds,” Benz said.

That makes sense, however, “retirees who are comfortable with some variability in their year-to-year cash flows and the possibility of leaving a residual balance at the end of 30 years will likely want to favor a higher stock allocation,” she said.

Read more: How much can you contribute to your 401(k) in 2024?

How Morningstar came to this conclusion is complicated, but here’s the link for the nitty-gritty details. (Trust me, it’s complicated.)

The reasoning behind the math? As yields on bonds and cash have increased, the forward-looking prospects for portfolio returns — and in turn the amounts that new retirees can safely withdraw from those portfolios over a 30-year horizon — have continued to inch up. A more moderate inflation outlook has also contributed, according to the researchers, who used an annual 2.42% long-term inflation forecast this year, versus 2.84% last year.

Here’s how it all works: Start with a $1 million initial investment, a 4% stated withdrawal rate, and a 2.42% inflation rate, you would withdraw $40,000 from the portfolio in Year 1, $40,968 in Year 2, $41,959 in Year 3, and so on.

“Retirees who take steps to enlarge their non-retirement portfolio income through strategies like delaying Social Security and/or working longer will be best positioned to employ variable spending and withdrawal strategies,” Benz said.

Trading board is showing a crash in stock exchange market. Selective focus. Horizontal composition with copy space.Trading board is showing a crash in stock exchange market. Selective focus. Horizontal composition with copy space.

Stock market volatility is just one of the risks retirees face when calculating how much to withdraw each year from accounts. (Getty Creative) (MicroStockHub via Getty Images)

Of all the risks in retirement that can impact your chances of outliving your money — which include inflation, market volatility, or high out-of-pocket medical bills from a health crisis — longevity may be your biggest threat.

In fact, most people don’t think about longevity risk when it comes to saving for retirement in the years before they step out of the workforce. “In our recent TIAA Institute study, more than one-half of American adults lack a basic understanding of how long people tend to live in retirement, a knowledge gap that can keep them from saving enough money to last as long as they live,” Surya Kolluri, head of the TIAA Institute, told Yahoo Finance.

A new study by Jackson and the Center for Retirement Research at Boston College backs up Kolluri: Its survey of some 1,000 investors aged 55 and up revealed that about one-third underestimated their life expectancy. (Take this six-question quiz from the TIAA Institute and the Global Financial Literacy Excellence Center at the George Washington University School of Business to see if you have a grip on your own life expectancy.)

Time horizon is the big variable

In many ways, longevity becomes the biggest variable that impacts your spending needs. For some financial advisors, the 4% withdrawal rate touted by Morningstar’s report is simply too high. “There are too many risks,” said Joe Goldgrab, an executive wealth management advisor at TIAA. “If the market does poorly in the initial years after you retire, your money won’t have as long to compound, and you could shrink your savings sooner than expected. That’s especially true if the inflation rate is high.”

In reality, a good retirement spending plan should be one where only one-third of your retirement money comes from withdrawals from your investment portfolio, added Goldgrab. The other two-thirds should be lifetime income such as Social Security, pensions — but those are becoming increasingly rare — and annuities, which a growing number of workplace retirement plans are including as an investment option.

Hip senior gay man in colorful shirt dancing on a Turquoise background laughing and having fun. Part of the LGBTQ Portrait series.Hip senior gay man in colorful shirt dancing on a Turquoise background laughing and having fun. Part of the LGBTQ Portrait series.

A survey of a little over 1,000 investors aged 55 and over showed that about one-third (32%) of respondents underestimated their own personal life expectancy, making them potentially in jeopardy of the early draining of financial resources. (Getty Creative) (Willie B. Thomas via Getty Images)

It’s critical for retirees to get this math right, or close to it, to be ready for the rocketing costs of long-term care which can blow all the best spending calculations out of the water.

This week a disturbing report, “Dying Broke,” was published by KFF Health News and The New York Times on America’s long-term care crisis, which has left scores of boomers staring at the possibility of having their savings wiped out by the sharp increase in the cost of care. Among those ages 50 to 64, many on the cusp of retirement, only 28% said they have set aside money outside of retirement accounts that could be used to pay for future living assistance expenses, per KFF polling. This share is higher among adults ages 65 and older (48%), but most adults in this group say they have not put any money aside for this purpose.

The staggering majority of adults say that it would be impossible or very difficult to pay the estimated $100,000 needed for one year at a nursing home (90%) or the estimated $60,000 for one year of assistance from a paid nurse or aide (83%), according to KFF’s data.

As Yahoo Finance reported this summer, an apartment in an assisted-living facility had an average rate of $73,000 a year as of the second quarter of 2023, according to the National Investment Center for Seniors Housing & Care (NIC) — and costs go up as residents age and need more care. Units for dementia patients can run more than $90,000 annually.

The 4% rule hangs on

How much someone can spend each year from their retirement accounts really is a tap dance that’s unique to their circumstances. And the 4% withdrawal rate is a percentage that has been the standard used as a tentpole for years and still is said by the financial advisors I reached out to this week.

“Over the years, we have traditionally used anywhere between 3.5% and 4% as a safe withdrawal rate for a moderate portfolio with 60% equity exposure and 40% fixed income exposure,” George Reilly, a senior partner and financial planner at Reilly Financial Group in Metuchen, N.J., told me.

Someone starting withdrawals in their mid-to-late 60s can take an initial withdrawal of 3.5% to 4.0%, increased by 3% annually, assuming a life expectancy of 92, Katherine Tierney, a certified financial planner and senior strategist at Edward Jones, told Yahoo Finance.

Working longer can help stave off withdrawals from retirement accounts, let you add to accounts, and delay Social Security benefits to take advantage of a roughly 8% annual bump if you wait from full retirement age to age 70. (Getty Creative)Working longer can help stave off withdrawals from retirement accounts, let you add to accounts, and delay Social Security benefits to take advantage of a roughly 8% annual bump if you wait from full retirement age to age 70. (Getty Creative)

Working longer can help stave off withdrawals from retirement accounts, let you add to accounts, and delay Social Security benefits to take advantage of a roughly 8% annual bump if you wait from full retirement age to age 70. (Getty Creative) (Jose Luis Pelaez Inc via Getty Images)

Of course, if your retirement time horizon is shorter because you have stayed on the job until, say, 70 or older, you may be able to afford a higher starting withdrawal, she added.

My takeaway: Use Morningstar’s rate as a good starting point and then channel your inner spirit of improv.

Kerry Hannon is a Senior Reporter and Columnist at Yahoo Finance. She is a workplace futurist, a career and retirement strategist, and the author of 14 books, including “In Control at 50+: How to Succeed in The New World of Work” and “Never Too Old To Get Rich.” Follow her on Twitter @kerryhannon.

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