Helping retired clients determine how much they can reasonably spend from their portfolios is one of the knottiest problems that financial advisers contend with. Not only is the client’s spending horizon unknowable, but so are market returns and the trajectory of inflation. Christine Benz, Director of Personal Finance and Retirement Planning at Morningstar, explores why flexibility, diversification and withdrawal discipline are becoming increasingly important within retirement income planning.
Heuristics like the 4% guideline are popular, but William Bengen’s seminal research that underpins the 4% rule is based on US market returns and inflation. Examining historical data on stock and bond returns and inflation for 20 developed markets, retirement researcher Wade Pfau found that a 4% starting withdrawal rate would have been too aggressive for retirees in many markets, including the UK.
Another key caveat with any withdrawal rate research that’s reliant on historical market returns and inflation is simply that those conditions may not be repeatable; actual conditions could be better, or they could be worse.
Looking Forward
To provide withdrawal-rate guidance that considers current yields, valuations, and inflation, we turned to our colleagues in Morningstar’s Multi-Asset Research (MAR) team for forecasts on those variables for retirees in the UK. The MAR team develops forward-looking asset-class return assumptions, as well as assumptions about the expected volatility of each asset class and future inflation levels. We then extrapolated 30-year forecasts based on the MAR team’s assumptions.
After estimating the expected returns and volatility of various asset mixes, we used Monte Carlo simulations to vary the sequence of potential investment returns to test different starting withdrawal rates across varying asset allocation mixes and time horizons. We created hypothetical portfolios for UK retirees, using a globally diversified basket of equities, a high-quality bond portfolio with a tilt toward UK issuers, and a 10% sleeve of cash. With each asset-class combination, our model created 1,000 hypothetical return patterns, calculated from the portfolio’s expected annual returns and standard deviation. We then used these return patterns to seek the highest possible withdrawal rate, with a 90% success rate defined as when at least 900 of the 1,000 trials ended with a positive balance at the end of the 30-year period.
We assumed that the hypothetical retiree was aiming for stable inflation-adjusted spending over the whole period. In reality, retirees’ cash flows may be far more variable from year to year. In addition, we assumed a total return approach to spending. Our research considered portfolio spending only; it didn’t factor in non-portfolio sources of income like pensions.
The Good News
The good news for UK retirees is that the highest starting safe withdrawal rate over a 30-year horizon, incorporating those forward-looking forecasts, was 4.1% as of March 31, 2026.
The 4.1% rate came from portfolios with modest equity weightings of 30%; other asset allocation mixes pointed to lower starting withdrawals.
That the asset allocation is so conservative underscores the point that the model’s “base case” is also conservative. The primary reasons are that our base-case spending system takes an inflexible approach to spending, and it targets a high success rate of 90%. Those factors tilt the model toward conservative investments that have a smaller range of returns rather than equities, which have higher return potential but also higher volatility.
However, while conservative portfolios modestly improve the starting safe withdrawal rates, they do so at the cost of potential future wealth. Portfolios with equity weights of 30% supported the highest starting safe withdrawal percentage, but they also recorded lower median balances at Year 30 than did portfolios with more equity exposure.
And the Really Good News
We also explored the impact of more-flexible withdrawal strategies and found that ones that vary withdrawals from year to year have the potential to boost starting safe withdrawal rates significantly relative to the 4.1% from the fixed real withdrawal system we use as our “base case.” Every single flexible system we tested allowed for higher starting withdrawals than the base case. Two spending strategies – withdrawing a constant percentage annually and taking a fixed withdrawal based on the portfolio’s average balance over the previous 10 years – allowed for a starting withdrawal of 5.7%. With both methods, we applied a “floor” to ensure that spending in any year didn’t drop below 90% of the starting amount.
Flexible strategies like these are effective because they help to prevent retirees from overspending in periods of market weakness, while giving them a raise in stronger market environments. Adjusting withdrawal rates based on portfolio performance can also help ensure that retirees consume their portfolios efficiently. For retirees who aim to maximise consumption (which may encompass charitable giving and lifetime gifts to loved ones) during their own lifetimes, flexible strategies provide opportunities for spending increases when market performance is strong.
Variable strategies do entail trade-offs – specifically, the tension between a higher lifetime withdrawal rate afforded by a more flexible approach and the volatility those adjustments create in the retiree’s cash flows.
Defending Against Sequence Risk
Our research also explored the connection between sequence risk – the prospect of a retiree encountering poor market returns early in retirement – and retirement-portfolio withdrawals. We found that all-equity portfolios are particularly vulnerable to sequence risk: Among our tests of all-stock portfolios, nearly two-thirds of the failed trials – that is, those experiments where the funds didn’t last the whole 30-year period – occurred in those situations when the portfolio had lost value by Year 5 of retirement.
That illustrates that portfolio diversification plays a critical role in helping retirees avoid losses in the initial years of retirement.
Portfolio allocations that include a healthy allocation to bonds ended up supporting the highest starting safe withdrawal rates in our study, and that was true with all of the spending systems we tested. Bond exposure usually acts as a shock absorber, tamping down volatility and the risk of losses in earlier years, which in turn helps support a higher spending rate. Additionally, withdrawal strategies that reduce withdrawals following losses do a better job of defending against sequencing risk than strategies that take out the same amount regardless of portfolio performance.
About Christin Benz
Christine Benz is director of personal finance and retirement planning for Morningstar, Inc.
Benz joined Morningstar in 1993. Before assuming her current role, she served as a mutual fund analyst and headed up Morningstar’s team of fund researchers in the U.S. She also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.
She is a frequent public speaker and is widely quoted in the media, including The New York Times, The Wall Street Journal, Barron’s, CNBC, and PBS. In 2020, Barron’s named her to its inaugural list of the 100 most influential women in finance; she appeared on the 2021 list as well. In 2021, Barron’s named her as one of the 10 most influential women in wealth management.
