No matter how you slice and dice the figures, 2022 was a tough year for just about everyone on the financial front. Despite that fact, though, Morningstar’s annual 2022 Retirement Withdrawal Strategies Report suggests that safe withdrawal rates for retirement are higher than a year ago.
It seems like a bold statement, especially given the news that Australia’s annual inflation rate is now at its highest level since 1990. But Christine Benz, co-author of the 2022 report, says that despite stock and bond prices declining simultaneously while inflation spikes, there is a silver lining for those who are on the verge of retirement.
As Ms Benz explains, because equity valuations have declined and cash and bond yields have increased, the forecast amounts that new retirees can safely withdraw from investment portfolios over a 30-year horizon have risen in the past 12 months.
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Factoring that in, the report has declared 3.8 per cent as a safe starting withdrawal percentage, up from 3.3 per cent in 2021. That takes it almost up to the mythical ‘ideal’ withdrawal rate of 4.0 per cent.
As positive as the report’s outlook is, it is not one shared by all investment experts. Writing for the Advisor Perspectives website, Allan Roth, founder of the Colorado-based fee-only registered investment advisory firm Wealth Logic, explains why.
Referring to Morningstar’s results, which showed higher safe spending rates across all asset allocations over all time horizons, Mr Roth said: “I don’t agree with those results.”
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One of the sticking points for Mr Roth is that “Morningstar dramatically increased its return assumptions”. Those assumptions are unrealistically reliant on recent results, he believes.
“I’m reflecting on the past, which is far easier than predicting the future,” he said. “I can’t prove that Morningstar’s return assumptions are too high, but I believe the equity risk premium is far more stable than is justified by those large, one-year increases.”
Mr Roth cites an example close to his heart as a case in point: “I was in Japan in 1989 after its equity prices fell steeply, and its stock market is still below that level.”
Ordinarily, Australian retirees wouldn’t have much of a say in the matter in any case. Government legislation decrees that retirees under the age of 65 withdraw a minimum of 4 per cent each year, the rate sliding upwards with increasing age.
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But, largely as a result of the pandemic, those minimums have been halved for the past three financial years. As yet, no decision has been made by the Albanese government regarding maintaining that reduced minimum for the 2023-24 year.
Last year Morningstar declared that the ‘4 per cent rule’ was no longer relevant. The product of a 1994 study conducted by financial planner William Bengen, the study analysed data going back to 1926 and used it to conclude that retirees invested in a balanced portfolio (an equal mix of stocks and bonds) could safely withdraw 4 per cent of their original assets, adjusted for inflation, for 30 years and not run out of money.
Some consider Allan Roth’s assessment to be overly conservative, but as Mr Roth himself says, with his adviser’s hat on, “I’d rather have [clients] come back to me in a decade saying they have too much money than informing me they are running out of money”.
Are you concerned about your withdrawal rate? Do you believe the government should maintain the reduced minimum? Why not share your thoughts in the comments section below?
As a self-funded pensioner, I do NOT see the need for the government to mandate a withdrawl rate. Once again, the government believe it knows what is best for us – the “Nanny State” – rather than letting the owner of the asset decide how much he/she wants to spend the government thinks it can dictate the standard of living we want!
It seems even more absurd when, if I understand the situation correctly, any excess funds withdrawn can, until you reach your early 70s, be reinvested in superannuation with no work test.
Totally agree Peter. The government should keep their hands out of retiree’s pockets. It’s not their money.