Key Takeaways
- Lower equity exposure and elevated bond yields allow for a higher safe withdrawal rate and reduce the risk of retirees running out of money, Morningstar research finds.
- Stock market volatility early in retirement can still damage a portfolio’s ability to sustain spending over time.
- Flexibility in how retirees draw down and spend allows for higher withdrawal rates.
New Morningstar research shows that the popular “4% rule” for annual portfolio withdrawals still gives retirees a high chance of not running out of money over a 30-year horizon. In fact, the data show that by adopting a more flexible approach to spending and withdrawals during retirement, investors can safely withdraw a significantly higher amount, approaching 6%. However, another investing convention—holding a portfolio with a 60/40 blend of stocks and bonds—may be too risky for many investors who want to ensure their retirement savings last.
“A higher safe withdrawal rate corresponding with a balanced or even more conservative asset allocation has been a consistent finding since we began conducting this research in 2021,” says Christine Benz, Morningstar’s director of personal finance and retirement planning.
How Do Safe Withdrawal Rates Work?
A critical question for retirees is how to ensure their savings and investments provide a stable income. The calculation has become more challenging in recent decades as lifetimes have extended. Experts advise that to ensure the safest outcome, retirees should plan to make their money last 30 years.
The difficulty, of course, is balancing the various moving parts: spending, portfolio allocations, swings in the bond and stock markets, and inflation. That’s where the safe withdrawal rate comes in. Using robust calculations and financial modeling, the aim is to arrive at a percentage of a retirement portfolio that retirees would withdraw in their first year.
Critically, that amount in pounds should be adjusted for inflation each year. Otherwise, over time, the cost of living will erode the value of that withdrawal, leading retirees to come up short for day-to-day expenses. At the same time, withdrawing more than that amount would reduce the chances of savings lasting through the end of a lifetime. These models also do not incorporate income from pensions, which should be factored into any financial plan.
How to Make Your Money Last in Retirement
Is 4% Still a Safe Withdrawal Rate For Retirement Portfolios?
According to Morningstar’s model, the highest available safe starting withdrawal rate in the United Kingdom is 4.1%—broadly in line with popular financial planning literature around investing in later life. One reason the 4% rule holds is government bond yields, which have moved higher amid repriced inflation and interest rate expectations hovering around 5%—the highest level since the 2008 financial crisis. “Because fixed-income yields are robust today, that argues that new retirees in the UK can reasonably use a starting withdrawal percentage of roughly 4%,” Benz says.
There is a catch. Of the portfolios modeled by Morningstar in its research, the 4.1% withdrawal rate was most reliable in portfolios with only “modest” equity ratings of just 30.0%. This is half the equity exposure that savers often have in a 60/40 portfolio when building retirement pots.
“More equity-heavy portfolios generally don’t support the highest withdrawal rates because of their higher levels of volatility and associated sequence-of-return risk,” Benz says. “Our base-case spending system takes an inflexible approach to spending, and it targets a high success rate of 90%. Those factors tilt the model toward conservative investments that have a smaller range of returns rather than equities, which have higher return potential but also higher volatility.”
Changing the model to reflect a 100% success rate “reduces starting withdrawal percentages significantly,” according to Benz’s report. In turn, reducing the target success rate by five or 10 percentage points has “meaningful implications” for starting withdrawals.
How Flexible Retirement Strategies Work in Practice
On the flip side, “using a more flexible approach to retirement withdrawals can significantly boost the starting safe withdrawal rate,” Benz explains. Morningstar’s research arrived at two strategies that enable a safe withdrawal rate of 5.7%. “However, the right level of flexibility in a retiree’s spending system will depend on the individual’s tolerance for spending changes—including the extent to which fixed expenses are covered by nonportfolio income sources—and desire to leave a bequest.”
A flexible strategy may not be for everyone, but Morningstar’s research suggests an element of flexibility in retirees’ approach to drawdown “typically allows for higher withdrawal rates” over time. By taking lower withdrawals in weak market environments and slightly higher withdrawals in stronger ones, retirees can benefit from the upside while protecting themselves from the downside. Often this results from relying on cash holdings when market performance depletes portfolios.
“Variable strategies do entail tradeoffs. Specifically, the tension between a higher lifetime withdrawal rate afforded by a more flexible approach and the volatility those adjustments create in the retiree’s cash flows, which may also subject retirees to swings in their standards of living,” Benz says. “Consequently, some retirees may find flexible spending systems unacceptable.”
Safe Withdrawal Rates: a Temperature Check Rather Than a Prescription
Investors shouldn’t interpret the 4.1% rule as a hard and fast answer to more complex retirement planning problems. Those with extremely complex circumstances may require professional advice, as the Morningstar model does not account for the impact of potential investment fees or taxation on sizable portfolios.
Rather, the research should be interpreted as a “temperature check” for how “aggressive” or “conservative” retirees might need to be to meet their financial goals, and the interplay between asset allocation and the likelihood of running out of money in later life. “It’s also valuable to remember the interplay between actual portfolio values and withdrawal amounts,” Benz says.
For plenty of retirees, this will be a very delicate question. In the early years of retirement, expenses like holidays, gifts to children, weddings, and house deposits will likely require careful management. Spending requirements thereafter may decline. Likewise, care fees in later life may represent a significant chunk of liabilities.
“For retirees who want to make sure that they don’t short-shrift their standards of living in the early years of retirement, one of those variable strategies will likely be more appealing than the base case of fixed real withdrawals, which is a rigid spending system built for a worst-case scenario,” Benz says. However, some may prefer a more structured “paycheck” income—consistently withdrawing the same amount, adjusted for inflation, for 30 years.
How to Protect Against Market Volatility in Retirement
As in previous research papers on this topic, Benz also considered the impact of market shocks on portfolios. If investors encounter these in the early stages of retirement, the results can be very damaging for the health of retirees’ plans.
“One of the bigger pitfalls new retirees face is sequence-of-returns risk, which is the risk that losses early in retirement will jeopardize their portfolios’ ability to sustain spending over time,” Benz says. Strategies most exposed to sequence-of-returns risk were deemed equity-heavy because stocks are more volatile than bonds.
As a result, Benz found that an all-equity portfolio could support a much lower 3.4% starting spending rate for an investor making fixed real withdrawals each year. This would still result in a 90% probability of having funds remaining at the end of a 30-year retirement.
“Nearly half the failed trials corresponded with portfolios that had lost value by the end of year one. In other words, for retirees with all-equity portfolios, early-retirement losses are a harbinger of failure unless they reduce spending,” Benz says.ow a Retirement Portfolio Works in Practice
The report cites a hypothetical £1 million portfolio with a safe withdrawal percentage of 4%, or £40,000. Benz argues that if the portfolio increases to £1.4 million at the beginning of its second year of drawdown, the retiree could automatically take £40,000 plus an inflation adjustment—£40,860 based on a 2.15% inflation rate.
“Dividing that amount by the current balance—£1.4 million—tests for the percentage. The amount of £40,860 is just 2.9% of £1.4 million. As that 2.9% figure is about 27% less than the starting percentage of 4%, the retiree qualifies for an upward adjustment of 10%. The new withdrawal amount becomes £44,946—the scheduled amount of £40,860 plus the additional 10% of £4,086,” Benz explains.
She says this system can work in down markets, too. Specifically, if the retiree withdraws 4% of the £1 million pot in the first year and strikes “an investment iceberg” that causes them to lose 30% of the portfolio value in 12 months, the pot would be worth just £672,000 at the beginning of its second year. In isolation, this would be a sharp fall in the value of the retirement pot.
A second-year withdrawal of 4% would take a higher proportion of the remaining pot—£40,860. This would in practice be a 6.1% withdrawal rate from the original pot, far higher than the safe rate of 4.0%. To stay within the plan’s “guardrails,” the retiree would need to reduce their scheduled second-year withdrawal by 10% to £36,774. With UK inflation still running at 3.3% and expected to rise further, this may not be possible for some.
This article is based on The State of Retirement Income UK 2026 report by Christine Benz, Amy Arnott, and Tao Guo.
