Will the 4% Rule Finally Be Accurate in 2024?

Our annual study suggests that new retirees can spend more from their portfolios.

Amy C. Arnott 20 November, 2023 | 4:18AM
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Recent retirees haven’t had an easy time of it lately. When stock and bond prices both plummeted in 2022, many retirees saw big dents in their portfolio values; a typical portfolio made up of 50% stocks and 50% bonds would have lost about 16% for the year. While market conditions have improved a bit in 2023, balanced portfolios have yet to win back all of their 2022 losses as of Oct. 31, 2023. Making matters worse, higher inflation has forced many retirees to take bigger withdrawals as their portfolio values have shrunk.

But for people who are about to retire, the prospects for retirement income look a bit brighter. In our newly released research paper, “The State of Retirement Income 2023,” my co-authors Christine Benz, John Rekenthaler, and I estimate that retirees drawing down income from an investment portfolio can now afford to withdraw as much as 4.0% as an initial spending rate, assuming a 90% probability of still having funds remaining after a 30-year time horizon. That figure is the highest safe withdrawal percentage since Morningstar began creating this research in 2021. (The highest starting safe withdrawal rate based on similar assumptions was 3.3% in 2021 and 3.8% in 2022.)

The reason? 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 edge up since we covered the topic last year. A more moderate inflation outlook has also helped: We used a 2.42% long-term inflation forecast this year, versus 2.84% in 2022.

Retirees who are willing to employ more-flexible strategies or make other modifications to a basic approach of using 4% as a starting point for withdrawals and then adjusting that dollar amount each year for inflation can enjoy even higher starting withdrawals, assuming they’re willing to accept other trade-offs, such as fluctuating year-to-year real cash flows and the possibility of fewer leftover assets at the end of a 30-year period.

Digging Into the Research: An Analysis of Safe Withdrawal Rates

As in last year’s study, we employed a “base case” to test safe starting withdrawal rates. Specifically, we assumed a new retiree with a 30-year anticipated time horizon who would like to secure a 90% probability of not outliving their money. We assumed the retiree was using a fixed real withdrawal system, which involves setting the starting withdrawal amount and then taking inflation adjustments to that dollar amount each year thereafter.

We held these key inputs steady from last year, but the overall assumptions for portfolio returns rose based on the capital markets assumptions put together by our colleagues in Morningstar Investment Management. 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 edging down to 9.41% from 9.88% in 2022. At the same time, though, expected fixed-income returns (including cash) moved up to 4.81% from 4.44% in 2022. As mentioned above, more temperate inflation assumptions were another positive. Our 30-year inflation forecast eased down to 2.42% from 2.84% in 2022.

Projected 30-Year Asset Class Return % and Inflation % Assumptions, 2023 vs. 2022


A table showing the 30-year projected returns for various asset classes as well as inflation in 2023 vs. 2022.

With two out of the three main assumptions trending in a positive direction, our research suggests that people heading into retirement today can reasonably use a higher starting withdrawal rate than indicated last year. As shown in the table below, we estimate that a new retiree planning for a 30-year time horizon can safely withdraw as much as 4% of the portfolio’s value as a starting safe withdrawal rate for a portfolio with a 40% equity weighting. Because of the more attractive yields available on fixed-income securities, we found the same figure applies to portfolios with equity weightings as low as 20%.

30-Year Starting Safe Withdrawal Rate %, by Asset Allocation, 90% Success Rate

A table showing estimated safe withdrawal rates for portfolios with equity weightings ranging from 0% to 100% of assets over time periods ranging from 10 years to 40 years.

Investors might expect that safe withdrawal rates would increase with higher equity weightings, but that’s not necessarily the case. Our return assumptions still assume that stocks will deliver significantly better long-term returns than bonds and cash. As a result, equity-heavy portfolios typically ended up with more money left over at the end of the 30-year period. But stocks also court significantly higher levels of volatility, which makes the outcomes for all of the withdrawal rates tested inherently less certain. In addition, we targeted a success rate of 90%, which is relatively high. This also tended to tilt the scales in favour of the less volatile assets of bonds and cash.

For retirees with time horizons both shorter and longer than 30 years, portfolios with equity weightings of 20% to 40% also generally supported higher withdrawal rates than more equity-heavy portfolios. As shown in the table above, retirees with shorter time horizons can safely withdraw significantly more than the 30-year baseline assumption, but safe withdrawal rates ratcheted down at a more modest pace for retirees with longer time horizons.


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About Author

Amy C. Arnott  Amy C. Arnott, CFA, is director of securities analysis for Morningstar.

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