Morningstar Update: The 4% Rule May Need Tweaking?
Referencing annual research from Morningstar, Casey discusses how much retirees can sustainably withdraw from their investments each year. Morningstar cites a “safe starting withdrawal rate” as 3.9% for 2026.
This would be for a 30-year, set-and-forget retirement.
Case explains the recommended rate changes with market and inflation assumptions. This “safe rate” has ranged roughly from 3.3% to 4% in recent years.
He also notes real-life withdrawals can fluctuate! And temporarily higher early-retirement withdrawals (e.g., 5.5%–6%) may be acceptable, if they don’t persist into the future. This may compound into an unsustainable path.
Key factors include guaranteed income beyond Social Security, early-retirement spending patterns, planning for healthcare and long-term care, tax treatment of withdrawals, access to accounts before age 59½, flexibility before required minimum distributions in your mid-70s, and using higher withdrawals to delay Social Security to increase lifelong guaranteed income.
Key Takeaways:
- Morningstar’s 2026 research suggests a 3.9% starting withdrawal rate for a 30-year retirement.
- Withdrawal rates may vary year-to-year depending on markets, inflation, and income needs.
- Guaranteed income sources can affect how much you withdraw from investments.
- Taxes, RMD timing, and Social Security decisions influence retirement income strategy.
- Sustainable retirement planning requires individualized analysis, not a fixed rule.
Timestamps:
00:00 Retirement Withdrawal Question
00:21 Morningstar 2026 Safe Rate
01:06 Set and Forget Limits
01:40 Higher Early Withdrawals
02:30 Income Sources Matter
03:07 Taxes and Account Access
03:29 RMDs and Tax Planning
03:50 Delay Social Security Strategy
04:05 Personalizing the Plan
04:38 Wrap Up and Next Report
Morningstar Update: The 4% Rule May Need Tweaking? – Links
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Morningstar Update: The 4% Rule May Need Tweaking? Transcript
How much can I afford to take out from my portfolio each year in retirement?
And is that sustainable over the long term?
Two very good questions and, two big questions that we help folks answer here all the time.
Usually, before someone retires and they want to help contextualizing.
And they want help answering the decision of whether or not they can afford to do that.
Luckily, for us, Morningstar puts out a research piece each year.
That specifies, based on their research, what is a “safe portfolio withdrawal percentage” for that year.
And in the year of 2026, that number is 3.9%.
Morningstar’s done this study for the last couple of years.
The number changes each year, based on:
– forward-looking market assumptions,
– past market performance,
– future inflation rates, etc….
In 2022, 2023 inflation was pretty high.
The impact the numbers over the last couple years, it’s been between 3.3 and 4%.
So right around that range has been a good, safe portfolio distribution rate to start with.
Morningstar specifies that the 3.9% is for the “set it and forget it” type person who wants a set 3.9% distribution rate for their 30 year retirement.
Putting that into practice, though, usually doesn’t work that way.
We see fluctuations both up and down in pretty much every year.
But again, it’s a good place to start with that 3.9%.
One thing I do want to point out, and one big point to make is, and Morningstar again makes this in their piece and, we see it here in practice every day…….
Is that having a higher distribution rate than 3.9% or 4% for a couple of years, especially in the early years of retirement, is probably okay over the long term.
So if you have, a 5.5% or 6% distribution to start with…. for a year or two if you maybe you want to retire early.
And this is how you do it (get to that), is, you have to pull some more from the investments to start with…….
The key is to not let that compound on itself.
We can’t let it spiral out of control.
Because, you know, if that goes on for more than a couple of years, that’s where problems start to begin.
So just because, we start out with a 5% or 6% pull rate, doesn’t mean that that’s going to continue for five plus years — or you know, well into your seventies and eighties.
That can’t continue.
That is not a sustainable trajectory.
Another thing that’s very important is the composition of your income sources.
Do you have guaranteed income — above and beyond social security?
Because if you do, then, maybe you can afford to run through the portfolio a little bit earlier.
Research does show that the early years of retirement tend to be more expensive than, your later years.
The real big thing that you want to plan for (are) health issues and costs related to, you know, long-term care, and things like that.
But if you have higher guaranteed income, then maybe you can afford to pull a little bit more from the investments early. Because you have that floor in place later in life.
Another thing you want to consider is how much of your income is going to be taxed as “ordinary income” versus “capital gains?”
Do you have cash to live on — in the first couple of years?
If you want to retire early, that is… if you want to maybe you want to retire before 59 1/2……
You’re probably going to (need to) have some cash or brokerage assets, to pull from — because you can’t access those retirement accounts yet.
How many years of income flexibility do you have?
Before your required minimum distributions (RMD’s) kick in with your retirement accounts.
That’s, your early, mid-seventies now.
But if you’re retiring in your mid-sixties, you have maybe 6, 7, 8 years there — of flexibility.
Maybe you want to pull some income forward. That’s going to increase your distribution rate.
But if it’s in service of paying less tax overall, then you know, that could be a good idea.
Another thing we see often is a higher distribution rate in service of delaying social security. And getting, again, that income floor increase.
You know the longer you defer social security, the higher your guaranteed income is going to be over the course of your life.
I realize I’m asking a lot of questions here!
And not really providing a ton of answers!
That’s because without digging into YOUR specific circumstances or your specific situation, it’s impossible to answer these questions.
So again, thanks to Morningstar for giving us something to aim for — that 3.9% starting portfolio distribution rate.
It’s a good place to aim for.
And you know, that might be enough for you if, if you say, I’m under 4%, “I’m good to go!”
(Perhaps) you don’t want to get into the nitty gritty details of it.
That’s great.
But the questions I brought up are ways that WE help folks optimize their retirement plans, every day here.
We’ll look forward to Morningstar 2027 piece.
We’ll see what the numbers look like then — I’m sure we’ll be talking about it.
And, I just want to say thanks for watching this week’s video.
We’ll be back with you on the next one.
