New retirees who want to ensure their money lasts for 30 years should plan on spending about 4% of it in their first year. The financial services company Morningstar issued its annual advisory Monday, and it recommends a starting withdrawal rate of 3.8%, reports the Wall Street Journal. The idea is to start at that percentage and make adjustments for inflation in subsequent years. As Yahoo Finance notes, 4% has long been the benchmark advice on such spending, but Morningstar actually reduced it to 3.1% last year. This year's bleak stock market performance plays a role in the shift back closer to 4%.
"It’s counterintuitive, but when valuations are high, it is the worst time to retire," said Morningstar's Christine Benz. The Journal elaborates: "Today’s lower stock and bond valuations support expectations for higher future investment returns than was the case last year." In terms of examples, someone retiring with $1 million today (split evenly between stocks and bonds) should spend a max of $38,000 in 2023, per the Journal. If inflation rises to 5% next year, the maximum spending would tick up to $39,900 in 2024.
Of course, lots of retirees or those on the cusp of retirement have seen their overall pool of money shrink this year—by as much as 23%, notes planadviser. The increased spending advisory, then, might not provide much comfort. "It’s the amount that really matters, and a higher withdrawal rate may not deliver enough cash flow for some," says Benz. Meanwhile, CNBC reports that of those who do have $1 million in savings, 35% say it's still "going to take a miracle" to be financially secure in retirement. (More retirement stories.)
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