Time to deep-six the 4 percent rule for retirement withdrawals?

A new report from Morningstar raises fresh questions on whether the 4 percent rule for retirement withdrawals can still hold for today's investors.

In its 2024 State of Retirement Income study, which gamed out how a variety of investment, income, and spending strategies might work out for a US investor in retirement, Morningstar Retirement estimated retirees drawing solely from investment portfolios could safely start withdrawing from their nest eggs at a 3.7 percent withdrawal rate.

That number, which Morningstar's model predicted would result in a 90 percent probability of funds lasting through a 30-year retirement, represents a modest reduction from the 4 percent it calculated in 2023.

"The decrease in the withdrawal percentage compared with 2023 owes largely to higher equity valuations and lower fixed-income yields, which result in lower return assumptions for stocks, bonds, and cash over the next 30 years,” the report noted.

The highest safe starting withdrawal rates, Morningstar emphasized, applies to portfolios with equity allocations between 20 percent and 50 percent, assuming a 30-year spending horizon. But while that conservative asset exposure minimizes the likelihood of failure – defined as when a retiree outlasts their savings – that also leads to lower median balances at the end of the period compared to portfolios with higher equity exposure.

The study also did other simulations based on actual spending trends among retirees, noting that inflation-adjusted spending often decreases over time. Based on that dynamic spending, Morningstar estimated that retirees could get away with a higher withdrawal rate of 4.8 percent, with a 90 percent probability of success over a 30-year timeline.

But the most secure approach, Morningstar suggested, incorporates a blend of different retirement income sources. That means aside from their investment portfolios, retirees should look at how they claim Social Security benefits and possibly add annuities to the mix.

“Retirees seeking the highest level of lifetime income should consider a combination of delayed Social Security filing and a flexible withdrawal strategy such as the guardrails approach,” the report said. "While cash flows from the guardrails strategy look volatile on a stand-alone basis, the addition of Social Security income adds valuable stability."

For retirees with above-average life expectancies, it said delaying Social Security can offer significant advantages, particularly if they have nonportfolio income such as rental income or part-time work to pick up the slack in their early retirement years.

"[A]n allocation to a simple immediate or deferred annuity can also help enlarge in-retirement cash flows. But ... the allocation to the annuity early in retirement reduces the money in the portfolio that can compound over the retiree's drawdown period," the report said.