Retirement Pros Take On Inflation, 4% Rule at Morningstar
What You Need to Know
When it comes to inflation’s effect on retirees, the big concern is health care, David Blanchett noted.
Just because there has been economic turmoil doesn’t mean we need to change up retirement rules, said Karsten Jeske.
Long-term care is the major concern now, said Christine Benz.
When it comes to inflation’s effect on retirees, the big concern is health care. For example, at age 65, 10% of savings might be spent on it, but at 85, that jumps to 20%, said David Blanchett, managing director and head of retirement research for PGIM DC Solutions, at Morningstar’s annual conference session, State of Retirement Income, held Wednesday.
Also on the panel were Christine Benz, Morningstar director of personal finance and retirement planning, and Karsten Jeske, founder of Early Retirement Now. It was moderated by Jeff Ptak, Morningstar chief ratings officer and co-host with Benz of the podcast “The Long View.”
Current Markets
Ptak also wondered if current market conditions mean a change in withdrawal strategies.
Just because there’s been an economic shock “doesn’t mean we have to throw out everything we know,” Jeske said, adding that previous studies on safe withdrawal rates took into consideration worst-case scenarios. “We’re not out of bounds now of historical intervals, such as double-digit inflation in the 1980s.”
He added that he doesn’t see a 70% stock market drop as in the 1929 period happening. He said, however, that “maybe 4% [withdrawal rate] does work, but [withdrawing at] a lower rate might be more pleasant,” especially in hedging uncertainty.
Benz noted that for those in accumulation mode, buying in the down market works. “Perhaps [recent market turmoil] hasn’t felt good … yet it could take pressure off savers in the long run,” she said.
What should retirees do if bonds “get whacked”? Ptak asked.
“Stay the course,” Blanchett responded. “Also look at alternative investments. But it’s foolish to think 60/40 isn’t valid. It is.”
Jeske said he might raise risk a little by moving a portfolio to 70/30, noting that bond yield at 3% could be a diversifier.
4% Rule
The speakers were somewhat mixed on the 4% withdrawal rule. Blanchett said he might push it to 5%, but it depends on household spending.
Jeske, a proponent of the Financial Independence, Retire Early movement, known as FIRE, said some people in the “early retirement community” — those in their 40s and 50s — “don’t take into account that they will have Social Security, so they first withdraw from their portfolio.” He said it’s a multi-staged process that is personalized for each client.
