Morning Star just released their state of retirement income report leading into 2024 in this report they discuss six retirement withdrawal strategies that can help stretch your savings and help you live a better retirement let's talk about those six strategies in today's video now this paper has a lot of interesting commentary it's published every November and previews the next year ahead updating asset return expectations and in general focusing deeply on income planning for reti in this year's report there was a focus put on two key areas that I was happy to see the first is talking through Dynamic income strategies outside of the basic 4% Rule and shows how certain strategies can do a better job fitting to a retirees personalized goals for instance if your goal is maximum spending you'll find one strategy is a clear winner relative to others if your goal is having the largest Legacy a different withdrawal strategy will make more sense we'll discuss this topic IC in depth as we go through this video today the other Focus I was glad to see was an emphasis on planning for actual spending versus static spending so many retirement plans are built around the assumption that you're going to need to spend the same every year simply adjusted for inflation but this goes in the face of a lot of data around retirees actual spending again we'll discuss this impact as we go through this paper now as we walk through the withdrawal strategies to follow I think it's important to spend a minute on the assumptions used in this paper after all an analysis is really only as strong as the assumptions used within the asset return expectations the one thing to note here is that morning star sees below historical average returns for large cap stocks ahead because large cap is generally the largest holding in a retirees growth portfolio this will mean that the data to follow will preference having a bit more in safety than classic 60/40 or balance portfolios would typically have in practical application I'm quite skeptical on anyone's ability to forecast returns and would hesitate to make big allocation shifts like let's say under waiting large cap but outside of this this paper runs at Thousand trial Monte Carlo to generate the data ahead a balanced portfolio of 40% in stocks and 60% in safety was used as the base portfolio the main reason for this was again that adjustment in the return expectations I just discussed then a 30-year retirement was used here as well now we're going to show and talk through each of these six with strategies one by one the first is the common and often used 4% rule as the base case now this is a simple rule but one that I see a bit of confusion around the 4% rule does not mean you withdraw 4% of your assets each and every year in retirement rather the 4% only applies in year one of retirement you start by withdrawing 4% of your portfolio balance and then from there you simply adjust from the previous year's withdrawal by inflation regardless of your portfolio's value your portfolio could could cut by 50% and you would still only adjust the next year's withdrawal by inflation you can see a simple 4-year analysis on the screen for what this would look like in real world application in essence the goal of this method is to start with a safe withdrawal rate and then simply adjust that to maintain purchasing power over your entire retirement now last year you probably saw a few news articles claiming that the 4% rule was dead either because of lower bond yields or higher inflation both of these were quote unquote killing the 4% Rule now miraculously 12 months later the 4% rule is back on as a general note you should be extremely skeptical anytime you see articles written like this I think you should take them with a grain of salt often they're more interested in getting clicks than improving your retirement keep in mind what exactly the 4% rule is and how it was originally found the 4% rule was established in the mid 90s and was based on a worst case scenario historically meaning if you had the worst timing possible to begin your retirement historically you would have been able to spend at least 4% starting out and then make it last through a 30-year retirement the average withdrawal rate was around 6% the highest withdrawal rate in this given situation was around 99.8% so to say the 4% rule is no longer valid you are basically saying that we are expected to see a new worst case scenario that is a big weighty prediction to make and I think the idea of lowering the 4% rule is thrown out far too often the current 4% rule was set during a time when we saw both bad stock market performance bonds losing to inflation an inflation above 5% for a 30-year retirement now a new worst case scenario will likely be said at some point in the future but it will be unlikely anyone will be able to predict it at the onset of retirement the next withdrawal strategy is one that is as safe as you can get has 100% success rate over 30 years it would increase your spending by 15% from the base case and that would be using a tips ladder and ladder out all 30 years worth of income need you would take Zero Market risk with this strategy but also worth noting that you would have Z left at the end of those 30 years and so if you ended up living more than 30 years you'd be only living off Social Security at that point in time but let's talk about what tips are tips are inflation protected treasury Securities and are made up of two components the first component is your par value think of this kind of like your principle this is the inflation protected piece and will be based on changes to CPI the second part of this bond is the coupon rate this is a rate that will not change for the life of the bond let's use an example of $1,000 par and a 2% coupon rate in the first year you'll earn 2% or $20 and then let's also say inflation is 3% this first year your par value will now adjust up by 3% to $1,030 and then you will receive a 2% coupon going forward based on that value essentially it's it's a treasury bond with built-in inflation adjustments Now tips are not a free lunch however notice the yield difference between a normal 10-year treasury bond and a 10year tips there is over a 2% Gap so say inflation ran at 0% for 30 years youd be better off building a ladder of normal treasuries rather than tips but these tips can be used as a simple and safe way to guarantee an inflation protected level of income based on the data in this paper you'll be able to take a starting withdrawal of 4.6% rather than just 4% for a 15% raise the third strategy is one called forgo inflation adjustments this allows retires to spend about 10% more than the base case it leaves a similar median ending portfolio but does introduce some small spending volatility but what does this strategy look like in practice what exactly does this mean to forgo inflation adjustments well it's very similar to the 4% rule but with one key difference in a year where your portfolio Falls relative to the previous year's level you would ignore the inflation adjustment say you start with a million dollar and a 4.4% withdrawal rate going into year two your portfolio grows and inflation is 3 and 1/4% so you make an inflation adjustment but in year two let's say your portfolio falls from the previous year's level and so in this case inflation was 2% but you would ignore this inflation adjustment as a safety precaution of sorts now the drawback here is that inflation adjustments that are missed are never made up again they're never added back in So a string of a few losing years with higher inflation can mean that you have far less purchasing power in a potentially big way next we have the required minimum distribution method and this is an interesting one where I believe the context is ultra important first let's summarize the results a reti would be allowed a 4.4% starting withdrawal rate assuming this 65 this method would give a retiree the highest lifetime withdrawal rate which means it nicely maximizes spending alongside the growth of spending but income volatility is highest in this method the money left at the end is the lowest in this method because of that high lifetime withdrawal rate so now let's talk about exactly how this strategy works if you pull up these single life expectancy tables you will see a list of Ages and a factor right next to that age if you take 100 and then divide by the factor for that given age you will get the withdrawal rate for that year said differently you can take your portfolio and divide by that factor and you will get your allowable withdrawal for that year you calculate out your withdrawal the same way you would your normal rmd once you reach those ages this method completely ignores inflation adjustments on the screen I have four years showing the income difference and the volatility of income now the underlying rmd withdrawal rate will steadily increase as a percentage each and every year as you age the older you are the more you're able to take from your portfolio on a percentage basis but because of this portfolio volatility is really what will control the income volatility from years 1 to two this retire seeson almost $6,000 increase only to have that amount Fall by about $33,000 the next year if a retiree were to make it into their '90s they would see an over 15% annual withdrawal rate now let's step back for a second and think about the cont around this method first I think the income volatility for anyone can be quite jarring now to smooth out this volatility I think a retire will be biased towards a safer slower growing portfolio one that's a little bit more dependable this may actually cost them in the long run as they let's say put all of their money in bonds they won't necessarily see as much income volatility because bonds will be a little bit safer and smoother but because of that they'll be sacrificing future growth because they won't have a stock Market piece or allocation that will lead to that higher growth second if your portfolio is maintaining value through the first 15 years reasonably well then the biggest spending that you will have in your retirement comes in the last 15 years of retirement which is basically the reverse of what most retirees would actually want most retirees prefer to spend more when they are younger because they will have more ability to gain benefit and enjoyment from that money as they are more able to use that discretionary spending next we have the guard rail method this is a d Dynamic income model and involves both inflation adjustments and spending increases or declines based on your portfolio's performance if your portfolio does better you get to spend more if your portfolio does worse you may see some spending adjustments down to maintain long run sustainability now based on the research this gives retirees the highest starting spending which makes it quite interesting for those that value spending in their early years and want to maintain the highest spending over time the starting increase is a 35% increase from the base case lifetime withdrawal is the second highest in this situation and there is some spending volatility because of variations in adjustments up and down but also know there's a reasonable balance left at the end in the median simulation so this approach seems to allow for increase spending on the front end and also a decent balance in the other categories that we might care about now there are numerous guard rail methods the one cited in this paper is the gtin Clinger method I'm going to show this method a little differently than I have with the last examples and use an example explain in the paper let's say someone starts using the 4% Rule and they have a million doll portfolio now after year 1 the portfolio let's say increases to $1.3 million and inflation is 2% now that retiree automatically takes that 2% inflation adjustment for a base income now of $40,800 now $4,800 is a 3.1% withdrawal rate based on that $1.3 million portfolio 3.1% % is more than 20% lower than the starting withdrawal rate of 4% so this person qualifies for a another 10% increase on top of that inflation adjustment now know that the opposite would happen in the other direction as well in a down Market if the loss was large enough there may be a 10% cut there as well basically if the withdrawal rate hits Beyond one of those 20% band either way there is a 10% adjustment in that direction it's also worth noting that there are no cut back tax in the final 15 years of retirement due to bad returns being less impactful in later years essentially this method is designed to adapt to market conditions and inflation but adjust the volatility of income by a predetermined 10% level in either direction this cuts down vastly on the volatility compared to the rmd method we'll show a little bit later how interesting this method is in the context of increasing or lowering your stock allocations here as well then last but not least we have the actual ual spending approach this approach gives a 25% increase in starting withdrawal rate and leaves a similar median ending portfolio as the base case in my personal opinion this should be the base case for the majority of retirees because it more realistically follows a spending path that you will actually experience on this channel we talk a lot about the retirement spending smile and how real spending tends to drop over time in your 60s when you are the most capable to enjoy discretionary spending your discretionary spending is the highest this discretionary spending tends to drop over time as you age and are able to do less because of things like health so rather than assuming we need to maintain the same purchasing power each and every year in retirement this method reflects the reality that for most real spending actually drops within this method we'll look at using normal inflation adjustments based on CPI growth but then in addition we're going to factor in the natural spending decrease that we would expect we basically want to adjust this inflation number by that adjustment relative to that decade these adjustments are based on Research from the employee benefit Research Institute and for the first decade this adjustment would be 1.9% and it would change in the second and third decade within this analysis so this method follows the 4% rule path with the only variation being that additional inflation adjustment that we would add in again in my opinion this should be the base case for most retirees and as the added benefit of allowing for larger spending in that first decade of retirement when retirees will as we've talked about I think find the biggest pleasure out of that spending now let's talk through some summary data to give more context around these strategies by let's say adjusting the equity allocation first we start by looking at the starting withdrawal rate know that as you increase Equity allocation your guard rail withdrawal rate increases to a point of a 60 to 70% stock allocation at this point the increase from the 4% rule would be nearly 40 % in terms of your starting spending as you will have less stock allocation the actual spending method actually wins out in this scenario next we will look at the highest lifetime withdrawal rate the rmd method wins out in this situation but again remember that the biggest spending and the reason this lifetime withdrawal rate is the highest is because the biggest spending will happen later in retirement which is going to be less ideal for most in second place we see the guardrail method win out across the board so if spending is most important to you I highly recommend considering a dynamic strategy third we'll look at income volatility again income volatility will be highest for those Dynamic methods this is both a feature and a bug Dynamic strategies are meant to on average improve outcomes by adapting to Market environments when the adjustments are increases this is fantastic when the adjustments are decreases it's a little bit more difficult to manage now note the rmd method as already explained is the highest and very difficult to handle the large portfolio swings that will then lead to the large income swings as well then finally highest ending balance is the highest in the base case and forgo inflation adjustment methods as we talk about each of these methods you should step back and consider what is the primary goal of your retirement plan if your primary goal let's say is the largest ending portfolio value then the method you use is less important than making sure you're consistently under spending from your portfolio this is basically what those two methods that win out on this screen end up doing as we saw the 4% rule gives you the lowest starting income of all methods so the reason it has the highest ending value is largely because you spend less over time no method is going to win in all categor so choosing a method that fits your goals is going to be most important here then finally I want to leave you with two ideas that aren't included in this paper that I think will add to these six strategies first I would love to see some data point added to this analysis that is tied to the utility of income in given years now what do I mean here we know that not every dollar of wealth is equal despite that dollar of wealth being worth well the same $1 now let me give you an example of what I mean the first $100,000 of wealth that you make is extremely valuable to you it has very high utility it means you now have an emergency fund and can withstand unexpected expenses $100,000 can also start to compound and grow in your favor to larger and larger amount mons over time now what if we take the same $100,000 but now we look at that $100,000 increase from 5 million to 5.1 million ah that $100,000 is far less valuable at this point most people in this situation will barely notice that $100,000 increase and will certainly get far less enjoyment from that $100,000 so the utility of wealth on an absolute basis changes well utility of wealth should also be measured based on age in my opinion spending $100,000 at age 60 will give you vastly different utility or pleasure than spending $100,000 at age 90 and so higher spending on the front end of retirement should be preferred to larger spending on the back end said differently the guardrail method should be preferred by most relative to the rmd method even if the total spending throughout retirement was the same the actual spending method should be preferred to the base case method even if the total spending was the same because spending earlier is more beneficial for most the other point I want to note is that all of this data should be coordinated and ran on an individual basis most Ries have social security how does the timing of Social Security change the data that we presented further certain strategies can be combined for even more interesting results a guardrail method could be fit to the retirement spending smile for additional variations and accomplishing a different set of goals combining methods can allow for even higher spending on the front end without sacrificing important income later on we actually recently did a presentation talking about how the 4% rule massively changes when you start coordinating with other assets like Social Security pensions and more you can click here to learn more but I hope you found today's content informative and hopefully allows you to build a more personalized retirement plan that accomplishes the goals that you have always remember you don't need more money you need a better plan thanks for watching we'll see you in the next video