If you’re newly retired or will join the ranks soon, it’s time to think about how you plan to spend your nest egg.
Why it matters: Morningstar researchers are helping new retirees figure out where to begin. The recently published State of Retirement Income report concluded that the starting safe withdrawal rate for people beginning their retirement in 2026 is 3.9%. That number might appear low. However, the team has analyzed several strategies to lift it to almost 6%.
Morningstar portfolio strategist Amy Arnott has investigated the data and joined the podcast to explain flexible withdrawal strategies.
10 Questions on How New Retirees Can Boost Retirement IncomeYou and your fellow researchers determined the starting safe withdrawal rate for new retirees is 3.9%. Can you give an overview of how you came up with that estimate and what it means?On the Dec. 5 episode of Investing Insights, Margaret Giles talked with Christine Benz about that baseline estimate. Today, we’re going to focus on ways to bump it up as high as 5.7%. Why do flexible withdrawal strategies allow for higher withdrawal rates?Amy will write about the several flexible withdrawal strategies in a series of articles coming to Morningstar.com. She’s giving us a preview today. The base case of 3.9% might not be enough for some folks. However, they still want a predictable paycheck-like income. Which flexible withdrawal strategy would suit them, and how does it work?There’s a strategy that falls in the middle of the pack, not too conservative or too aggressive. It comes with an initial withdrawal rate a tick above 5%. How does the so-called Vanguard Dynamic Spending method work?Are there any disadvantages with this middle-of-the-road approach?A lot of folks want to travel, spoil their grandkids, and more. If spending while you’re still alive is more important to you than leaving a bequest, which strategy works here?The constant percentage and endowment method allow for the highest starting safe withdrawal rate of 5.7%. New retirees should brace for some bumpiness in their annual spending, right?If someone prefers the idea of leaving money to their loved ones or charities after they pass away, which approaches could help them achieve their goal?How important is portfolio diversification when using flexible withdrawal strategies?What’s the takeaway for the class of 2026 retirees who are figuring out this next phase?Key Quote on Portfolio Diversification’s Role in Increasing Retirement Income
It is pretty important to have a balance between equity exposure and fixed-income exposure. And the reason for that is fixed income can be a really nice buffer against volatility. So if you’re kind of putting the brakes on portfolio volatility, that decreases the odds that you’re going to run out of money and allows for a higher safe withdrawal rate. But one thing I would note is we based all of these estimates on a 90% probability of success, which is pretty high. So, if you’re comfortable with a lower probability of success, understanding that you might need to make some adjustments over time, you could have somewhat higher equity exposure and still end up doing pretty well.
Amy Arnott, Morningstar Inc portfolio strategist
The Takeaway: Figuring out how to spend and stretch your retirement savings can feel overwhelming. However, identifying your priorities can make the decision more manageable, says Arnott. First, ask yourself what’s important to you: spending more during your lifetime or leaving a bequest to relatives or a charity. Second, consider working with a Certified Financial Planner to stress-test your retirement spending plan and help you determine what matters most during the next phase of your life, says the portfolio strategist.
More From Morningstar on Retirement Income for New Retirees
Flexible withdrawal strategies vary from conversative to aggressive. There’s one approach that sits in the middle of the road. The Vanguard Dynamic Spending method sets a floor and ceiling on how much the withdrawal amount can go up or down from the previous year, according to Arnott. If the starting withdrawal amount exceeds the ceiling, then cut it back to the ceiling number. If it sits below the floor, raise it up to the floor level. This approach would require making calculations as the portfolio value changes.
What’s a Safe Retirement Withdrawal Rate for 2026?
In this Investing Insights episode is a discussion on how Morningstar’s 3.9% initial safe withdrawal rate compares with the popular 4% rule. The recently published State of Retirement Income report examines the role of Social Security, Treasury Inflation-Protected Securities, and annuities. Also, check out this tutorial on how to use and how not to use Morningstar’s retirement income research.
Coming up: Investing Insights is starting a new personal finance series that will help you organize your financial life throughout this year. Morningstar Senior Editor Margaret Giles and Morningstar Director of Personal Finance Christine Benz will break down those meaty tasks into digestible bites each month. In the meantime, watch them discuss 4 Financial To-Dos to Kick Off the New Year. Margaret will host Investing Insights on Feb. 6 and talk with Christine about how to use your IRA to optimize your portfolio following 2025’s market performance.