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How Much Can I Take From My Retirement Savings?

It's complicated, but this method can keep you from running out of money

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The most difficult and important issue among those near or in retirement is “How much of my savings can I spend each year without running out of money?” Morningstar, the financial research company, has done some outstanding work recently to answer this question. Hint: It’s not the same for everyone.

The research was published in The State of Retirement Income: Safe Withdrawal Rates, by Morningstar experts Christine Benz, Jeffrey Ptak and John Rekenthaler. 

Benz told me this is such a difficult issue because of four critical unknowns:

  1. What will future market returns be for stocks and bonds?
  2. What will the rate of inflation be during retirement?
  3. Will we spend more or less as we age?
  4. How long will we live and, therefore, need our nest egg to last?

No one knows the answers to these questions. I’ve found that people who retire young tend to spend more money than when they worked, as they now have more time to do things that cost money, such as travel. And while no one knows how long each of us will live, it’s clear that a 90-year-old will, on average, have a shorter life expectancy than a 60-year-old. That means the 90-year-old can spend a higher percentage of his nest egg than the 60-year-old. 

There are a couple of critical points to understand. The first is that when estimating how much one can spend, we must take inflation into account. If we have an average of 2.21 percent annual inflation (assumption used by Morningstar), what costs $100 today will cost an estimated $155 in 20 years. The second point is that while stocks will, on average, produce higher returns than bonds, stocks are also riskier than bonds.  

Morningstar estimates a safe spend rate by running thousands of possible market return scenarios, using what’s called a Monte Carlo simulation of returns from stocks and bonds. A withdrawal rate with a 50 percent chance of running out of money would be too risky — no different than a coin toss. Instead, Morningstar looked for a 90 percent success rate, meaning the nest egg expired before you did only about 10 percent of the time.

The results

Here are the Morningstar results. Let me walk you through it.

Initial Safe Annual Withdrawal Rate 

based on your stock asset allocation and time horizon

% savings in stocks 10 years 20 years 30 years 40 years

100

8.3%

4.3%

2.9%

2.5%

90

8.6%

4.4%

3.0%

2.6%

80

8.8%

4.6%

3.1%

2.6%

70

9.1%

4.7%

3.2%

2.7%

60

9.3%

4.8%

3.3%

2.8%

50

9.5%

4.9%

3.3%

2.8%

40

9.6%

4.9%

3.3%

2.7%

30

9.7%

4.9%

3.3%

2.7%

20

9.7%

4.8%

3.2%

2.5%

10

9.5%

4.7%

3.0%

2.3%

0

9.5%

4.4%

2.7%

2.0%

Source: Morningstar

The table shows how much money you can withdraw from your retirement funds in the first year of retirement. The vertical axis on the left shows the percentage of your holdings that are in stocks. The horizonal axis on top is the number of years you expect to be in retirement. After the first year, you can increase your withdrawal every year by the amount of inflation.  

For example, suppose you had a $100,000 nest egg with half the portfolio in stocks. You expect to live another 30 years in retirement. You could withdraw 3.3 percent of this money, or $3,300, in that first year. This amount could increase each year with inflation. Someone (or a couple) with a 10-year life expectancy could spend 9.5 percent of their nest egg in their first year, while a young retiree with a 40-year life expectancy could spend only about 2.8 percent of the portfolio.

Note how the safe spend rate is higher when the portfolio has a moderate percentage of stocks. That’s because having so much in bonds is risky in that it’s unlikely to beat inflation after taxes, though having so much in stocks is also very risky as the stock market may not quickly recover after the next plunge.


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Morningstar used more conservative return assumptions than in the past. It assumed stocks would have an 8.01 percent average annual return, while bonds would return 2.71 percent a year. Rekenthaler told me they have received some criticism for being conservative, but I completely agree with Morningstar. With current yields so low, it’s highly unlikely that bonds could yield what they have over the last 40 years, and stocks are quite richly valued today. As Benz put it, “We didn’t use historic rates for the same reason we don’t pick investments based on past performance.” Past performance is not indicative of future performance. 

Though the 2.21 percent annual inflation assumption is far lower than very recent inflation, Rekenthaler notes that the bond market is, for now, not believing inflation will stay high for the long run as rates are still relatively low. As he says, “the bond market is right more often than wrong.” Both the more conservative assumptions used by Morningstar and the fact that life expectancies have increased result in a lower safe spend rate than the conventional 4 percent used for so many years.  

What does this mean for you?

According to the Federal Reserve, about half of the population (median) between the ages of 65 and 74 has a net worth of $266,400, but the weighted average (mean) is about $1,217,700. This includes home equity. Rekenthaler agreed with me that it would be OK to use a conservative value of the house as, later in life, one could sell the house or tap the equity via a reverse mortgage. 

Using a 30-year life expectancy (we are living longer), the person or couple with a $266,400 net worth could withdraw about $8,791 a year while the wealthier couple could withdraw $40,184 annually; both would increase annually with inflation. This is calculated using 3.3 percent of one’s portfolio. Someone with only a 20-year life expectancy could spend 4.9 percent of the portfolio. (Social Security isn’t counted in this calculation; it’s in addition to your savings.)

Critical caveats   

There are a couple of important points to understand before you follow these guidelines. First is that fees matter, and the Morningstar work did not reduce returns from those fees. Rekenthaler calculated that paying 1 percent in fees (to the fund manager, the adviser or both) lowered the safe spend rate by 0.4 percentage points to 2.9 percent.  

Next, it’s always important to have a backup plan. I suggest developing a budget that includes both nondiscretionary and discretionary expenditures. For example, utilities are typically nondiscretionary, while vacations and entertainment are mostly discretionary. So, if markets plunge and don’t quickly recover, you should be ready to reduce expenditures, at least for a while.

The Morningstar paper notes a retiree can spend more than these numbers if they use various methods to cut expenses, but I recommend starting with the numbers calculated by Morningstar. As I tell clients, I’d rather they come back to me in a decade saying they have too much money than tell me they are running out of money. The first issue is easier to solve. 

If you are reading this piece, it means you have likely done what I’ve never been able to teach — living below your means and building a nest egg for your financial freedom. It’s important to enjoy the fruits of your labor. As you age, you may very well be able to increase that safe spend rate according to the table, especially if markets perform well. 

Allan Roth is a practicing financial planner who has taught finance and behavioral finance at three universities and has written for national publications including The Wall Street Journal. Despite his many credentials (CFP, CPA, MBA), he remains confident that he can still keep investing simple.