Challenging Morningstar’s Safe Withdrawal Rates

Morningstar released its report, “The State of Retirement Income,” in late 2022. Its key finding was that a balanced portfolio had a 90% success rate withdrawing an inflation-adjusted 3.8% annually over a 30-year period. That’s a large increase from the 3.3% in its 2021 report. A $1 million portfolio could support an additional $5,000 in inflation-adjusted spending, which is a 15.1% increase over last year’s number. Morningstar’s results showed higher safe spending rates across all asset allocations over all time horizons.

I don’t agree with those results.

I sent an email to the three Morningstar authors, Cristine Benz, Jeffrey Ptak, and John Rekenthaler noting I’d be writing about it and asking some questions. They are brilliant researchers who have helped countless investors achieve financial independence and have always demonstrated an open mind to feedback. The response from Rekenthaler didn’t surprise me: “The paper was intended to spark discussion. I will be happy to address your questions, and will be interested to see what you have to say.”

Return assumptions

The key assumptions in the report were the forecasted long-term returns. These returns are driven by two factors – the expected annual arithmetic returns and the volatilities, measured as standard deviations, for individual asset sub-classes. The greater the standard deviation, the lower the long-term geometric returns will be compared to the arithmetic returns. Morningstar dramatically increased its return assumptions.