Are You Withdrawing Too Much From Retirement Accounts?

Older woman with empty wallet
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For decades, retirees have been told they should not withdraw more than 4% of their assets if they want to reduce the risk of running out of money during their golden years.

Now, a new study says that rule might be too generous.

Financial services firm Morningstar says the new rule of thumb should be that retirees withdraw no more than 3.3% of their portfolios annually. Today’s low yields on bonds and high equity valuations mean “retirees are unlikely to receive returns that match those of the past,” Morningstar says.

After estimating both future investment performance and inflation rates, Morningstar reached the conclusion that the more conservative 3.3% withdrawal rate is a safer bet.

That means a retiree with a $1 million portfolio could safely withdraw $33,000 in his or her first year of retirement. Under the 4% rule, that amount would be $40,000.

It is important to note that Morningstar acknowledges that if the future unfolds differently than it expects, the 3.3% rule could be too conservative.

In addition, it notes that the time horizon used in its projections “exceeds most retirees’ expected life spans,” and that retirees might be able to make adjustments — such as reducing withdrawals and reining in spending when the market dips and waiting for investments to recover — that would allow them to safely withdraw more.

Financial planner William Bengen is credited with inventing the 4% rule in 1994. Bengen’s research found that over every rolling 30-year time horizon since 1926, retirees with a portfolio of 50% stocks and 50% fixed-income securities could have withdrawn an annual amount equal to 4% of their original assets without running out of cash.

Under Bengen’s scenario, the amount withdrawn each year also was adjusted for inflation.

Ironically, Bengen said earlier this year that he now believes the original 4% rule was overly cautious. He added that retirees likely can safely withdraw up to 4.5% of their portfolios annually.

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