0:00

Please stay tuned for important disclosure

0:02

information at the conclusion of this

0:04

episode. New

0:11

retirees could kick off their golden

0:13

years. Put a familiar number four

0:15

percent. A trio of Morningstar researchers

0:18

analyzed starting safe withdraw rates from

0:20

an investment portfolio to fund retirement.

0:22

The future looks good and a

0:24

little flexibility could make it even

0:27

better. John Reckon Dollar and his

0:29

coat authors ran a numbers. The

0:31

Vice President of Research or Morningstar

0:33

Research Services is here to discuss

0:36

what they found. Thanks. For being

0:38

here John. Hughes Be. So the

0:40

big headline number from the latest

0:42

report is four percent initial withdrawal

0:44

rate. Talk about why that number

0:46

matter so much. While

0:49

first over just started by the

0:51

irony of this because for present

0:53

historically has been. And

0:55

of the rule of thumb. On. That

0:57

people have used when thinking about

1:00

how much money can I spend

1:02

from my retirement portfolio, that four

1:04

percent number assumes it's it's four

1:06

percent of. Yours. Starting

1:08

Portfolio: So you have a five hundred thousand

1:10

dollar portfolios Or four percent of those twenty

1:12

thousand dollars and you would spend that. In

1:15

year one, the next year.

1:18

You. Would spend the same amount adjusted by

1:20

inflation. So like as was Social Security,

1:22

it would go up by the rate

1:24

of inflation. So. Twenty. Thousand

1:26

Dollars them. If inflation is whatever, then

1:28

it goes up to twenty one thousand,

1:30

say than Twenty Two. So you're keeping

1:32

the same purchasing power and four percent

1:34

is. Based. On

1:36

some research from thirty years back ah

1:39

of a fellow and Bill Begun did

1:41

some work and said this historically has

1:43

always been a safe number. so that's

1:45

that's when I recommend Now We did

1:47

all this seventy page whoop. You

1:50

know, thousands of simulation, seventy page

1:52

paper. And this year's additionally

1:54

exactly ended up hurting the rule of thumb

1:56

number. So and a we all we did

1:59

is sort of. Yeah, I guess

2:01

you could say confirm what people already knew

2:03

arm, but there's a little more to it

2:05

than that because we did plugin. The.

2:07

Current numbers. Ah, that.

2:10

The stock and Bond markets are out and making

2:13

these projections and we have done the study in

2:15

the past and come up with different numbers. Is

2:17

just so happened that we ended up on it

2:19

to start number this time and to finally get

2:21

your question of why is this important Well I

2:23

mean it's a it. Is.

2:25

Just an estimate, but. You.

2:28

Only get people get one shot at

2:30

retirement and if you have a retirement

2:32

portfolio. I think it's important to try

2:34

to spend the right amount of money if you

2:37

spend too much and he lives here as a

2:39

good fortune to live long. That. Could

2:41

be a problem right as you. If

2:43

you're running out of of of assets

2:45

of a still alive and hit on

2:47

you, don't really want to end this.

2:49

leave this world we're having. Regret that

2:51

you spent two little m. And

2:54

and denied yourself on the use

2:56

of those money such he saved for

2:58

retirement so it be in. It's

3:00

nice to be Goldilocks and try to

3:03

find the right size share. Or

3:05

that perfectly. Temperature

3:08

of course. right? The or you're right, we

3:10

can go wicked. Continue with a Goldilocks analogy,

3:12

but right? You don't want, you don't want?

3:14

What does it need is a baby bear?

3:16

Share? That was right. I think mama hairs.

3:19

with that you make any waves. Yeah, let's

3:21

leave the fairy tales biden. go back to

3:23

reality. My. Rights while the new

3:25

rate is higher like you said,

3:27

Morningstar suggested race and twenty Clinton's

3:30

report list replay percent and then

3:32

twins mainline support three point three

3:34

percent. What has changed? What

3:37

has changed? The main thing is that the

3:39

bond yields are much higher than they were

3:41

if you look if you remember back saddam.

3:44

In twenty twenty ah, yields on

3:47

long government bonds reached as well

3:49

was one percent. And at the

3:51

time that we did this report.

3:54

They. Were up about four and a half

3:56

percent that calm down slightly since then

3:58

and our sins are portfolios. Normally

4:00

when you look at the portfolios we

4:02

do evaluate a mix of portfolios but

4:05

the put follows that end up. Being.

4:08

Most. Appropriate for most people.

4:10

Have a balance of stocks and bonds

4:12

and on their their their their balance

4:14

portfolios and dumb. To. Have a

4:17

lot of fact audible born sinner and those

4:19

are my son for for now for sense

4:21

that a one percent which that That's the

4:23

main factor we have. We. Also have

4:25

a slightly more optimistic. Forecast.

4:27

For equities after the Twenty Twenty Two.

4:30

Downturn, but that that's a smaller

4:33

factor. So basically we did in

4:35

our projections. Ah, I'm. Because.

4:38

Our bond yields are higher, future returns

4:40

will be higher on fixed income, and

4:42

that will make for a somewhat higher

4:44

spending right. And you and

4:46

your team called the base case scenario

4:48

conservative. The breakdown is twenty to forty

4:51

percent and stops and the rest in

4:53

cash and pas de talk about the

4:55

trade off. For. Conservatives: stock. Yeah.

4:58

Well right we. If

5:00

if you look at the mouth at we

5:02

do and we say what's the highest withdrawal

5:04

rate. And portfolios

5:07

can sustain and is done over thirty year

5:09

period and we run a lot of trials

5:11

and simulations using the assumptions on the markets

5:13

and so forth. You end up with is

5:15

relatively conservative portfolios of twenty to forty percent

5:17

in equities. It's important to note though and

5:20

wage with as you read through the report,

5:22

you can see it all. But we're just

5:24

talking the highlights here. I'm. It's.

5:26

Important to note that if somebody has sixty

5:28

or seventy percent in stocks. The

5:31

withdrawal rate. The safe withdrawal rate figure

5:33

that we come up with is almost

5:35

the same is three Point Eight a

5:37

three point nine percent said of percent,

5:40

so there's a slightly lower. We'll.

5:42

Probably success I guess you could

5:44

sites or I'd some slightly riskier,

5:47

but there's a lot a reason.

5:49

To. Be more aggressive because in most

5:51

cases under under most conditions because

5:54

where. You know which we're

5:56

evaluating for worst will get worse case scenarios

5:58

under most conditions we have. You're seventy

6:00

percent equity portfolio. You can end up with

6:02

more money over time. Your there's a good

6:04

chance you'll even grow that nest egg rather

6:07

than that then cut into it. As with

6:09

your spending, so it's some is certainly something

6:11

that people should consider. This is just. Did.

6:14

As a starting point that's why be

6:16

called a base case. Our view is

6:18

to we help the people who have

6:20

at least look at the highlights of

6:22

this reports and think through the details

6:24

because one size does not fit all

6:26

and retirement by any means. I mean

6:28

people's personal conditions are different, her life

6:30

expectancies are different, dirt their taste for

6:32

risks, different spending patterns, and so forth.

6:34

So. This. Is you know?

6:37

It's. A It's important, Unsound. We need to

6:39

come up with some numbers. As.

6:41

A starting point as with that four

6:43

percent number is but as not any

6:46

coins get his himself or less self

6:48

reflection. gotta do self reflection and into

6:50

and and customize of again the show

6:52

is he notices somebody's life so. Pay.

6:55

A little can spend a little time on it and think

6:57

about it. Now they're safe.

6:59

Withdrawal rate debt is a portfolio

7:02

stuck out his and science and

7:04

you just mentioned ah, explain why

7:06

and the potential risks and benefits.

7:09

Was you? If you're basically the way

7:11

of the math works as if you

7:13

add more equities to portfolio my stocks

7:15

to put follow. It becomes more volatile

7:17

and. On average over time it

7:19

will make more money so under most

7:21

conditions. As I had said, You're.

7:24

Going to be better off adding more

7:26

equities, but. If. The

7:29

Market Sir. Seats are

7:31

unfavorable, particularly over up a prolonged

7:33

bear market. say a two three

7:35

four. Your bear markets and that

7:38

pool of capital is shrinking. And.

7:40

Then you're pulling out money each year from

7:43

a declining pool of capital. That's where you

7:45

investors can run into trouble. The can get

7:47

to be a point where. As

7:50

you're removing money from. From

7:52

investments said er et cetera that

7:54

are losing value. Zap

7:56

portfolio gets so so small that it

7:58

can't really come. That if I'm legit

8:01

reason can't come back is because you're

8:03

still continue you need to spend from

8:05

it it doesn't get a break or

8:07

if you're saving for retirement and you

8:09

and you just set those money's aside

8:11

as as a bear market. And

8:13

then the bull market comes back. You're.

8:16

Gonna bounce back. But when you're pulling

8:18

money out, withdrawing money from a portfolio,

8:20

the ability to sustain a bear market.

8:22

It's not us. It's not the same,

8:25

is much harder to sustain a bear

8:27

market. That's where the mask for this

8:29

these kinds of i'm. Studies

8:32

as are different an them when

8:34

saving for retirement is more complicated

8:36

when people with drugs unfortunately retirement

8:39

his ass it It is the

8:41

most. Complicated. Financial situation and

8:43

and is one where you can least

8:45

afford to make a mistake because you

8:47

don't have time to go back and

8:50

redo it that see ah I guess

8:52

is the challenge associated with. Any

8:55

in retirement. In the

8:57

report also love that different spending

8:59

strategies which would allow retiree who

9:01

is flexible to spend more than

9:03

four percent and not run out

9:05

of money. Or

9:08

to their number of flexible strategies

9:10

again, Wow. We have

9:12

used words conservative a couple of

9:15

times. are are studies conservative where

9:17

we don't want people to. Ah,

9:20

We'd rather if they have if it did. Make

9:23

another mistake. but but as they do,

9:25

you know, sort of air to air

9:27

on the side of caution rather than

9:29

overspent. So this the four percent number

9:31

that we came up with. The assumption

9:33

is that the person is locked into

9:35

that same spending pattern every year. They

9:37

never change. If even some markets perform

9:39

very badly, they don't. They still take

9:41

the same amount out. The. Next year.

9:44

In reality, it's s not really what

9:46

people will do. at least I hope

9:48

not. You know you. You make contingency

9:50

plans as things are going well. maybe

9:52

spend some more things are going. On

9:55

usually poorly and your portfolio is shrinking

9:57

To be a little bit more careful

9:59

and we have some the rules various,

10:01

some. Systems One's called

10:03

guard rails and there's another

10:06

one where beef up. With.

10:08

This downturn you in i'm in a

10:10

market you spend less the next year

10:12

and you sit there with their various

10:14

systems in there that are that are

10:16

flexible so that are flexible and they

10:18

permit higher spending race often up to.

10:21

You. Know four and a half to five

10:23

percent withdraw race. Even so. People.

10:25

Have control over their up in

10:27

over their fortunes Isn't it? It's.

10:30

To. U cel up his base case but

10:32

he does mean say have to behave that way

10:34

So the good news is that to report that

10:36

will we haven't I report is released A starting

10:38

point. And up. People. Can

10:40

it's I? I think in most cases will be able

10:42

to do better than one. Them or were

10:45

saying so. I think what we're saying is an

10:47

I. In fact, I know what we're saying. I

10:49

just think his arm. Consider

10:51

four percent your starting point. In.

10:54

Retirement. Them. Look through the

10:56

circumstances and try to find ways

10:58

to get. He could probably safely

11:00

get four and hour for five

11:02

percent by by being flexible and

11:04

dumb. You

11:07

know, just dumb. Tinkering

11:10

with a strategy Lubbock, Tx quickly.

11:12

Layla Garber Other. Scarred.

11:15

Wells just is it. It is. Yeah,

11:17

not really. Was a

11:19

very good very quick version where the

11:21

guard rails is when emergency doing why

11:23

you spend spend more money and when

11:26

the markets didn't poorly you spend less

11:28

money so there's like it is a

11:30

guard as white called guard rail. It's

11:32

just kind of. It's is seeing how

11:34

your portfolio was doing and it's making

11:36

adjustments and keeps you from. Spending.

11:40

Too much. When. Times are

11:42

bad. And. But does give

11:45

you a race. Ah, when times are

11:47

going well, that was a great explanation I

11:49

guess. So. Let's

11:51

talk about the role of guaranteed

11:53

income Likes Us Securities? How can these

11:55

income. So if sources pollster retire and

11:57

spent a. While the

12:00

more ago today and com net an

12:02

investor has the more with the can

12:04

afford to take with their non guaranteed

12:06

income that is with their investment portfolios.

12:08

And that's primarily in this paper. When

12:10

we're talking about a four percent withdraw

12:12

rates, were talking about investment portfolios retirement

12:14

when a customarily called risky assets. So

12:16

some sort of portfolio of stocks and

12:18

bonds. Not a pension, not a sauce,

12:21

not social security, Not. I'm. An.

12:23

Annuity for those are all

12:25

guaranteed sources of income. So

12:27

via the guaranteed source of

12:29

ink income and a more

12:31

that they ideally guarantees sources

12:33

of income would completely. Seal

12:37

still it and investors are

12:39

of a retirees necessary spending

12:42

that required Spandex and then

12:44

the. If. He investment

12:46

assets would cover the discretionary spending socially

12:48

in a sense house money so you

12:50

can exhaust. Port follows if the if

12:52

there's a high degree of guaranteed income

12:55

we would say you probably wouldn't want

12:57

to adjust to twenty to forty percent

12:59

i quit, she probably won't have a

13:01

higher position equities and yes, the technically

13:03

the withdrawal rate that we come up

13:05

with a slightly lower which are protected

13:08

with this guaranteed income so you don't.

13:10

You don't have that same need as

13:12

somebody who's primarily living on on their

13:14

investment or. I'm so

13:16

it's so done with. I had

13:18

talked about the individuality or or

13:20

dollar how this as an individual

13:22

and personal choice depending on circumstances.

13:25

The amount of guaranteed income that

13:27

somebody's house is definitely. An

13:31

important factor knockout when on setting

13:33

up a strategies, somebody has a

13:35

small amount of social security forces.

13:37

A rather large social security plus

13:39

may be a a associated with

13:41

a business those of people in

13:43

very different. Positions. And

13:45

as he wrap up this conversation. The. Key

13:47

take away. But. He want to walk

13:50

away with it's Vicky take away his

13:52

arm. I think. Understand

13:54

the starting point of about four percent. Be.

13:57

Flexible monitor. The

14:00

year by year and you're not stuck

14:02

into. A lifetime plan, but you need to

14:04

have a starting point. And. As. He

14:06

did start somewhere and we think we've

14:09

provided the appropriate started going. To.

14:11

He chassis your time today. Glad

14:13

to be here! Ivana. That

14:15

wraps up this each other so

14:17

thanks. For listening. If you enjoy

14:20

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