Safe retirement withdrawal rate rises to 4%: Morningstar study

It seems as many retirees gear up for retirement, the calculations involved can be overwhelming when including rising inflation and average life expectancy. So how much money can retirees withdraw from their retirement investment accounts to meet their needs and not run out of cash? According to Morningstar, the number is 4% for 2023, up from 3.8% in 2022. Morningstar Inc. Vice President of Research John Rekenthaler joins Yahoo Finance Anchor Diane King Hall to discuss the report.

When asked about people's worries in outliving their retirement savings Rekenthaler responds: "The important thing to understand is we have a conservative approach when we are forecasting and saying 'Okay, people can spend 4% of their nest eggs' for one that's over a 30 year time horizon. So that's pretty long, if somebody is 65 years old, even with longer life spans today, that's taking you out to 95. Second thing is for the most part, people aren't spending as much money when they're 95 years old as when they're first retired...and the third is, in most cases - because we built this to have a 90% success rate according to our simulations - in most cases there is quite a bit of money left over at the end of the... period."

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Video Transcript

DIANE KING HALL: So for those people who did start to retire last year and didn't do as well, there's always, with regard to that or even people retiring now because people are living longer, the worry about outliving their money. What do you say to that with your base assumptions in this latest research?

JOHN REKENTHALER: Well, the important thing to understand is we have a conservative approach when we're forecasting and saying, OK, people can spend. This year it was 4%, 4% of their nest eggs. For one, that's over a 30 year time horizon. So that's pretty long. If somebody is 65 years old, even with longer life spans today, that's taking you out to 95.

Second thing is for the most part, people aren't spending as much money when they're 95 years old as when they first retire. They don't have as much energy. They're not doing as many things.

And the third is in most cases, because we build this to have a 90% success rate according to our simulations, in most cases, there's quite a bit of money left over at the end of the pool, at the end of the period. So should people live longer, they can do so. Of course, one can also supplement that by doing something like buying a lifetime annuity, which would be additional protection for living longer.

DIANE KING HALL: So what is the balance that investors then should have in there when you're thinking about retirement portfolios, whether it's a traditional IRA, Roth IRA, or 401k, especially when you look at what the data suggests about how much people have? I mean, the average balance that-- when I looked earlier this year or the last data for earlier this year was in six figures and it wasn't necessarily in the high six figures. This was the average. And when you think about the cost of living in general, what should the balance of people's portfolios be to protect for the future?

JOHN REKENTHALER: Well, the balance certainly does depend upon what lifestyle they want when they're retired and how much income that they have. I mean, I throw out that million dollar number, that's not a bad number to try to achieve. It'd be a very difficult number for somebody who's a lower-wage worker and not so difficult for somebody who's a professional and contributing into a say a 401k plan for many years.

And that would be $40,000 in today's money again. And we would assume that you can continue that purchasing power throughout retirement to supplement Social Security. But of course, that issue is, in a sense, it's a bit of a foregone conclusion with our report since we're projecting what people who have retired or are retiring and are at that point could do going forward. So what happened in the past is what happened in the past.