Morning Star's State of Retirement Income Report (2024)

Overview

• The report is published every November.
• Focuses on income planning and updates asset return expectations.
• Discusses six retirement withdrawal strategies.
• Two main focuses: Dynamic income strategies and planning for actual spending.

Key Assumptions

• Below historical average returns for large-cap stocks expected.
• Base portfolio: 40% stocks, 60% safety.
• 30-year retirement period simulated.
• Analysis conducted via 1,000 trial Monte Carlo simulation.

Withdrawal Strategies

1. 4% Rule

• Withdraw 4% of the portfolio in the first year, adjust by inflation in subsequent years.
• Misconceptions addressed: The rule does not imply withdrawing 4% each year, just the first year.
• Criticism and defense: Often pronounced 'dead' due to market conditions but remains valid.
• Originally devised in the mid-90s, considering worst-case historical scenarios.

2. TIPS Ladder

• Uses Treasury Inflation-Protected Securities (TIPS).
• Provides 100% success rate over 30 years but no remaining savings after 30 years.
• Zero market risk, but relies heavily on Social Security post-30 years.
• Components: Par value adjusts with inflation, fixed coupon rate.
• Allows a higher initial withdrawal of 4.6% for a 15% increase.

3. Forgo Inflation Adjustments

• Spend about 10% more than the base case but introduces income volatility.
• How it works: Skip inflation adjustments if portfolio value declines.
• Risk: Missing inflation adjustments can lead to reduced purchasing power.

4. Required Minimum Distribution (RMD) Method

• Works by withdrawing a percentage calculated from life expectancy tables.
• Allows 4.4% starting withdrawal rate, highest lifetime withdrawal rate.
• Highest income volatility and lowest ending balance.
• Suitable for maximizing spending but with considerable volatility.

5. Guardrail Method

• Dynamic model adjusting withdrawals based on portfolio performance.
• Provides the highest starting spending (up by 35%).
• Balanced between high spending and decent ending balance.
• Uses Guyton-Klinger method for adjustments.
• Trade-offs: Benefits of higher initial withdrawal balanced against spending volatility.

6. Actual Spending Approach

• Provides a 25% increase in starting withdrawal rate.
• Realistically mirrors retirees' actual spending patterns (Retirement Spending Smile).
• Assumes declining discretionary spending over time due to aging.
• Considered more realistic for most retirees.

Summary Data & Additional Insights

• Guardrail Method performs best with increased equity allocation.
• Highest lifetime withdrawal rates seen with RMD method.
• Income volatility is highest with Dynamic methods but more adaptable to market conditions.
• Highest ending balance found with base case and forgo inflation adjustment methods.
• Recommendation: Choose a method matching your primary retirement goal.

Important Considerations

1. Utility of Income
   • Higher spending in early retirement years brings more utility/benefit.
   • Earlier spending preferred due to higher utility compared to later years.
2. Combining Strategies
   • Coordination of Social Security and other assets can significantly impact outcomes.
   • Example: Combining Guardrail Method with Retirement Spending Smile.

Conclusion

• The importance of building a personalized retirement plan that meets individual goals.
• Dynamic strategies offer adaptability but include income volatility.
• Actual spending approach most closely aligns with real-world spending patterns in retirement.
• Coordination with other financial assets can optimize retirement outcomes.

Always remember: You don’t need more money; you need a better plan!