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Retirees can now draw 4% per year from a U.S.-based investment portfolio that is between 20% and 40% equities and still have a 90% probability that there will be money left after 30 years, according to a November Morningstar study.

This is the highest safe-withdrawal rate since the research began in 2021. Based on similar assumptions, the rates were 3.3% in 2021 and 3.8% last year.

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The results came from researchers who sought the highest withdrawal rate for each combination of time horizon and asset class, where at least 900 of 1,000 computer simulations showed a positive balance at the end of the period.

The higher withdrawal rate was made possible by more attractive bond yields and a lower inflation forecast, allowing for a more conservative asset allocation.

In the 20th century, stocks averaged about a 7.5% real return rate a year, but it has dropped since then, and Morningstar predicts it will go to 4.5% in the current era, said John Rekenthaler, Morningstar’s research director.

“If we thought history was going to repeat itself, we would recommend more equity-heavy portfolios. We don’t think that’s realistic,” he said. “Prospective stock returns are relatively low.”

With equity returns looking less favourable, an all-equity portfolio would only allow for a 3.3% safe withdrawal rate compared to 4% for a 40% equity portfolio. However, with the all-equity option, a $1 million investment is expected to yield a median remaining balance of $4.5 million at the end of the 30-year period, compared to just $1.5 million for the conservative approach.

“We’re testing for a 90% success rate. So, the number that we’re focusing on is not the median result,” Rekenthaler said. “You only get one shot at retirement; you don’t get to roll the dice again if it’s a bad number. We think [retirees] should take a relatively conservative approach in terms of the odds.”

He said retirees may be able to take a chance on a higher-equity portfolio if they are willing to cut back on their spending during difficult years. The report shows that the safe-withdrawal rate falls only slightly — to 3.8% — when a portfolio consists of 70% equities.

In previous years, Morningstar calculated all withdrawal percentages assuming the retiree would spend the same amount of money each month. However, some financial advisors suggest clients use a variable withdrawal rate and retirees may adjust spending to reflect inflation.

This year, Morningstar added a new methodology that assumes retirees increase spending by 1% less than the annual inflation rate. Under this method, people could take out 5% in early retirement with a lifetime withdrawal rate of 3.9%.

“As you get older, your energy might be less and you’ll do fewer things,” Rekenthaler said. “We wanted to alert people to the possibility that there are reasonable and thoughtful ways in which one could take out more money early in retirement — that tends to be when people want to spend the most.”