Strategies for Boosting Retirement Spending: How Advisors Can Maximize Client Outcomes (Safely)

Hi and welcome to Strategies for Boosting Retirement Spending, a special LinkedIn live and bright talk event from Morning Star. I'm Christine Benz, director of personal finance and retirement planning for Morning Star. My colleagues Amy Arnot and Jason Keepart are also with me today. We all co-authored a white paper for Morning Star in 2025 along with Tao Guo. It's called the state of retirement income. You can find a link to the paper in the attachments tab if you're viewing this on Bright Talk or in the comments section if you're watching this on LinkedIn. We've been producing this research every year since 2021. Amy's a Morning Star veteran with a tenure of more than 30 years. She's worn many hats over the years and is currently portfolio strategist and helps lead our research efforts on portfolio construction and personal finance. Jason's a senior principal on Morning Star's multi-asset team and he also focuses on retirement income strategies for us. Amy and Jason, thank you so much for being here. Great to be here. It's great to have you. So Amy, I want to kick things off with you. Maybe you can set the table by talking about what we're trying to achieve with this research. What are our main goals? So we really had three main goals. One was to try to estimate what might be a safe withdrawal rate for retirees looking forward. And this has been called the most difficult problem in all of finance because there's so many unknown factors. You don't know how long you're going to live. You don't know what the market is going to do. You don't know what inflation is going to be. So that was our first goal is to kind of come up with a baseline spending estimate for how much you could safely spend. Second, we wanted to look at a variety of flexible spending strategies that can help you potentially elevate that spending rate. And third, we wanted to look at the role of guaranteed income and how that works together with different spending strategies. Okay, Jason, turning to you. Uh, our research does have a different underpinning than the seinal research that William Bangan pioneered back in, uh, 1994 where he came up with what's now called the 4% guideline. Can you call can you talk about the differences in our methodology versus the one that Benan used? — Yeah, absolutely. And there are a couple key differences in our research versus kind of yeah, that classic 4% rule, right? Um the 4% rule was based on kind of rolling 30-year returns for US stocks and bonds. Um so it's very backwards looking. Um extrapolating the past kind of predict the future. But you know we feel that you know taking into account current market valuations, interest rates and inflation expectations are actually really key things you should consider when forming your safe withdrawal rate today. Um, so we take a forward-looking uh approach using asset class forecasts and inflation forecasts from our colleagues at Morning Star's multi-asset research team. — Okay. So, we're going to delve into those forecasts and the implications for safe withdrawal rates, but um I want to stick with you Jason and ask about the base case that uh we revisit in this research every year. Maybe you can talk about the assumptions that underpin that base case. What sort of spending system are we assuming someone's using? Yeah, we're using a couple key assumptions that really color our kind of findings. Um, one, we're using a fixed 30-year period. Um, two, we're assuming that whatever your safe with withdrawal rate is, you're adjusting that for inflation every year. So, you're not taking a haircut in purchasing power. And we're also assuming a 90% success rate, which means in 90% of the scenarios we tested, there was still money left over at the end. Some may say that's a little too conservative, but we wanted to start with the most conservative assumptions. Um, and then we could kind of build from there. — Okay. So Amy, let's talk about the headline number from the 2025 research. 3. 9% a touch lower than where we ended up in 2024. Can you talk about the major differences and what was driving that uh payday increase if people want to view it that way? — Yeah. So, we use um forward-looking return assumptions from Morning Star's multiasset research team as Jason mentioned and they had a methodology change where previously their return assumptions were kind of based on a top- down approach where they were looking at assumptions for earnings growth and potential valuation changes going forward. They're now incorporating some bottomup research from our equity analysts. incorporating our stock analysts fair value estimates for the companies that they cover. And because of that change, the return estimates um as you can see on the slide, went up kind of across the board. Um so that's really the main driver behind um the change in our baseline safe withdrawal rate estimate from 3. 7 to 3. 9. um that little bump up and without the method methodology change the number

would have been 3. 6%. Okay. Um one question that keeps coming up in this research in response to this research is if we intend people to ratchet up and down their withdrawal rates based on the feedback that we're providing here. So initially we were 3. 3% then it went up to kind of mid3rees. How are we intending people to use this if they're monitoring it from year to year? — Yeah, I think this can be an area of confusion and we definitely do not want people to be uh changing their percentage withdrawal rate every year. Um it would be kind of annoying to have to do that and um probably ultimately not that helpful because as you get older your withdrawal rate should be increasing in percentage terms. So, the baseline number that we come up with is really meant um to be a guideline for new retirees who are just starting out um retirement and trying to figure out how much they might be able to spend. — Okay, that's helpful. Um Jason, one consistent finding for the past several years has been that in this base case that highest safe withdrawal rate corresponds with a fairly light equity waiting very likely lighter than what many clients are bringing into retirement. Can you talk about why that is? — Yeah, I mean what we've consistently found is that 4060 is kind of the sweet spot. 40% stocks, 60% bonds. And the reasons behind that is one we're looking at this 30-year time horizon. Um and stocks obviously a lot more volatile than bonds. So a lot more different paths they can take. So as we're using our 90% kind of success rate, the bonds just create a little bit more stability and I think consistent spending. Um so that's kind of how we landed on the 4060 is kind of that sweet spot for retirees. — Okay. So, it's not a free lunch if you go forward with a fairly conservative positioning in terms of your portfolio. Can you talk about the tradeoffs there, Jason? What is someone giving up if they're saying, "Yes, I want that security of kind of a regular payday in retirement. I want the more bond heavy portfolio. " What are they likely to leave on the table? — Yeah. And it's always about trade-offs in retirement planning. I think you're always giving up something. Um, and what you're getting in the conservative thing is a little bit more maybe peace of mind that you're not going to run out of money at the end. But what you're giving up is, you know, maybe you could afford to spend more and maybe take an extra vacation or buy that car you've had your eye on or, you know, hit up a four star three star Michelin restaurant a little bit more often than you would. So, you are kind of giving up a little bit of that maybe. Um, but that's kind of that's, you know, really comes down to what do you prioritize as a retiree. — Okay. So, we are going to be sharing some polls throughout this uh presentation. Um, and so go ahead and uh be prepared to vote on Bright Talk if you're watching this on Bright Talk. If you are on LinkedIn, you can go ahead and put your response to the poll in the comments field. We'll be um monitoring the polls throughout uh the discussion here. So, get ready to vote on some questions that are forthcoming. Um Jason, I wanted you to talk about those asset class return assumptions that we have from our colleagues. They're somewhat conservative. Um so I'm wondering if you can talk about how historical safe withdrawal rates compare to those forwardlooking forecasts that we embed in our base case. — Yeah. When we look at the historical returns, we tend that they're the safe withdrawal rates actually a bit higher. Um, but we do take kind of a more conservative approach and as I mentioned earlier, you know, being aware of where interest rates are and where stock market valuations are is pretty important and generally higher than they have been in the past. Interest rates are lower So, that kind of all points towards maybe being a little bit more conservative with your safe spending. — Okay. Um, Amy, I want to turn to you. One of my favorite sections in the paper looks at some bad things that can happen in people's retirement periods. You delved into two specific big ones. One is bad market losses early in retirement and the other is inflation, high inflation early in retirement, which new retirees are contending with front and center uh today. Can you talk about the key takeaways for those sequence risks that people might encounter? Yeah. So the first issue you mentioned, sequence of returns risk can really be a big problem if you do happen to encounter a couple of bad years in the market um coinciding with the beginning of when you're retired. Um and we looked at in our the Monte Carlo sim simulation, we looked at the 10% of the trials that failed that did actually run out of

money before the end of the period. And we found that 70 of those um involved trials that where the portfolio had negative returns during the first five years. So that first five years of retirement is really a critical period. Um and then see inflation risk can also be a big issue especially if it occurs close to the beginning of retirement and the reason is because if inflation goes up but then moderates you still have sort of a permanent increase in your cost of living that is going to kind of ripple through the whole retirement period. Um, so that is another area that advisors and their clients would want to keep an eye on. — Okay. Um, Amy, I want to turn it over to you or discuss a section that you have been working on in the paper for the past several years where you looked at some of the flexible withdrawal strategies. I think we started out with just a couple when we initially looked at flexible strategies. you've been adding more including some new ones in the paper in 2020 uh five. Can you talk about some of the new flexible strategies that you added and evaluated? — Yeah, we actually added four new strategies this year. — One of them is what we call the constant percentage method which is a very simple approach where you just take a flat percentage of the portfolio balance each year as your withdrawal. So you're looking at the portfolio balance at the end of the year and then taking a percentage of that. Uh we looked at something that we call the endowment method which is similar but instead of just looking at the balance as of the end of the previous year it's based on an average over the past 10 years. So that can potentially smooth out your withdrawals a bit. Um, we also looked at something that we call probability based guardrails, which involves um kind of continuously checking up on your probability of success and if it increases past a certain level uh giving yourself a bump up in spending, if it goes below a certain level, kind of pulling back on spending. And then the fourth method we added was what we called the Vanguard floor and ceiling method which you know as the name implies is something that Vanguard has written about and it's another variation on the guard rails method that we've written about in the past where it's basically setting a limit on how much your withdrawals can increase or decrease from the previous year in dollar terms. Okay. so people can see on screen the implications for starting safe withdrawal rates with these flexible strategies. Amy, let's talk about the implications. Um, generally it seems like you can get a higher starting safe withdrawal percentage if you're willing to be flexible with your paydays from year to year. Can you talk about why that is and also where you tend to see the highest safe withdrawal rates among these more flexible strategies? Yeah. So, if you can, as you can see with the blue bars on the screen, um the starting safe withdrawal rates are all higher than our base case, which is the red line. Um so, having some level of flexibility in your spending can really make a big difference. Um, in the case of the method we call forgo inflation adjustment, where if the portfolio value is down in a given year, you're not giving yourself a cost of living adjustment the following year. That could potentially bump up your safe uh spending rate to 4. 3%. All the way up to as much as 5. 7% for the constant percentage and endowment methods. So, um, and the reason that flexibility can improve your ability to spend is because the base case, as Jason mentioned, is so conservative. And because you're never changing your spending, it you have to account for the worst case scenario that you might encounter. But with these flexible spending methods, you have more room to kind of adjust and course correct as you go on. And that allows you to be um more aggressive or more generous with your spending at the beginning of retirement. — Okay, thanks. That's helpful, Amy. So, we're seeing on screen the response to the poll question about the equity allocation for the typical retired client. As we can see, they're generally balanced or higher in terms of their equity exposure. So um that is a good piece of feedback not necessarily aligned with our research which I think had the highest safe withdrawal rate corresponding with that um with the

uh lower equity allocations 20 to 50%. So good feedback from our audience. My guess is that many of the adviserss watching are probably using some flexible strategies with their clients uh spending. Amy, I'm wondering if you can discuss the tradeoffs with these uh more flexible spending strategies. You obviously can boost your starting safe withdrawal rate and your lifetime spending by being flexible, but what are people giving up if they are embarking on a more flexible spending pattern or a dynamic one? — Yeah. So there are some basic tradeoffs and in many cases if you're using one of these flexible spending methods you are more likely to end up with a lower ending value which would mean less money available if it's important to you to leave a bequest to your family or to a charity. Um, and cash flow stability is another tradeoff area where um, if you're using a flexible spending method, as you can see on the slide, in most cases, you're going to have your cash flows bumping around a bit more. Um, so if you're someone who's looking for kind of a paycheck equivalent, you might be better off following the base case method where that is, you know, building in very steady cash flows throughout retirement. — Okay. So it seems like you can place these strategies on kind of a continuum where on the one end if you're using a flexible strategy that has just modest differences in spending from year to year. Um that would be sort of one choice that someone could make. And then the other ex the other extreme would be someone who's willing to put up with a lot of cash flow volatility in exchange for boosting lifetime spending. Let's start with that first category. the sort of modest adjustments. Do you have a favorite among those spending strategies? — I would point to what we call the actual spending method, which is based on some empirical data on how retirees actually spend during that 30-year period. And what the data tends to show is that people do tend to cut down on their spending as they get older. Um, so when we tested this method, we looked at an approach where you would um adjust the dollar amount for inflation, but then reduce that dollar value by 2% per year. So the spending is still increasing a little bit, but not as much as inflation. Um, and just by making that small change, um, you could bump up your safe withdrawal rate. Um and there is some you know there is change built into spending over time but the changes in spending are very small and also predictable — and driven by the data. We know that people actually do tend to uh spend in this pattern at large — right in on average maybe not every retiree but overall that does tend to be the pattern. Okay. So, let's talk about the more extreme dynamic uh spending strategies. Do you have a favorite or two that helps enlarge lifetime income for those people who really want to try to maximize their lifetime spending? Yeah, I would point to the constant percentage and endowment methods that we added this year. And both of those methods end up with uh the highest estimated starting safe withdrawal rate of 5. 7%. And so if you follow one of those methods, you if you're starting with a million-doll portfolio, you could be spending $57,000 uh in your first year of retirement. So obviously a lot higher than what you would spend under the 4% rule. Um the downside is if your portfolio value declines, you would have to cut back on that spending. Okay. So another dimension of this is the role of bequests that many older adults do have a strong desire to leave money for children, grandchildren, charity. Can you discuss that dimension in relation to these dynamic spending systems and maybe gravitate or tell us which of these strategies is most appropriate for that bequestminded retiree? — Yeah. So I think of you can think of lifetime spending and bequests as sort of a teeter totter where if one goes up the other one is going to go down. And the reason behind that is if you're spending more during your lifetime, there's less money in the portfolio to grow and compound over time. So, you're most likely going to end up with a smaller amount at the end of the 30-year period. Um, on the other hand, if you

are more conservative with your spending, there's more money left in the portfolio to grow, which could lead to a bigger dollar value at the end of retirement. So, it really depends on what's most important to you as an individual. And if you are someone who um has a strong interest in leaving a bequest, you might want to look at the base case which uh ends up with the highest amount uh left over at the end of 30 years in our modeling or um something like forego inflation adjustment where you're making some adjustments um over time but they tend to be very small. — Okay. both tend to leave significant leftover balances in many cases. Um, want to take a moment right now to encourage everyone to go ahead and submit your questions. We will be tackling them toward the end of this conversation. So, we would love to hear from you what's on your mind in the realm of retirement planning, safe spending rates, all of those topics. Um Jason, I wanted to turn it to you and talk about a section of the paper that you have spearheaded about how guaranteed income interacts with portfolio spending because most people have other income sources beyond their portfolios that they're relying on to provide them with cash flows. So you have spearheaded this section of the paper. Maybe talk about what are your goals with this section of the paper. Yeah, I think we're trying to take a more holistic look and because we know that there are things beyond your portfolio that are going to impact how you have how you spend in retirement. The most common is social security. Um, everyone's going to get that. Um, so how does that incorporate kind of with the portfolio spending, but then there are also tools like annuities and you know people don't like to say the a word but uh you know in certain circumstances and the very vanilla ones I think there is some potential benefits which we'll talk about. Yeah, we I think we just want to take a more broader look beyond just stocks and bonds. — Okay. So, uh conventional wisdom in the realm of retirement planning is that if people think they have average or maybe longer than average life expectancy, hold off on that social security claiming date. Um one conclusion that you reached by examining the data are is that um it really depends on what you're doing for income until that social security kicks in. So can you talk about that dimension? I think we initially were scratching our heads at that result, but walk us through what you found. — Yeah, so you know there's a lot of reasons to want to delay security. Um you get like an 8% boost in spending um from social security every year you delay it after 67. Um so there's definitely you know reasons to think about it but I think the big question becomes what do you do in the meantime? Like in theory, if you can and want to work till 70 and delay till then, that's probably like an ideal situation. We're just thinking about maximizing social security benefits. But most people aren't going to work till 70, um, at least not full-time. So, if you are retiring at 67, which is the full retirement age, or even earlier for whatever reason, you know, how do you bridge that gap between retirement and social security at 70, that kind of golden goose that people like to chase? And what we found is if you're having to pull from your portfolio, the impact is essentially that you're going to have less money to grow over time. So in most cases, you're going to end up with a lower ending balance. Um so if you wanted to leave money behind heirs or charity, um you know, you're going to have less money there because you're just pulling so much money in those three years to make up for the fact that you don't have social security coming in. don't want to, you know, just live on more meager terms because you just retired. Like it's time to live it up, right? You know, enjoy. You've worked very hard for this. You should enjoy it. So, we that's what we found is that yeah, basically if you're having to withdraw from your portfolio to make up for that, you know, you're just going to end up with less money probably at the end. And that's the trade-off there. — Okay. So sticking with non-portfolio income sources that are both guaranteed and inflationadjusted social security would be one. Another that someone would look at look to in that vein would be treasury inflation protected securities. In the paper you do examine using a laddered portfolio of TIPS bonds and using that to augment social security. Can you talk about what you found in 2025 and how did that compare to the 2024 result? — Yeah, it went up a little bit. Um, TIPS uh yields um got a little bit more attractive. Um, but what we basically found was that yeah, if you're just thinking about like safe our safe spending rate of like 3. 9%. You compare that to what you'd get with a tips ladder where you buy a tip that expires every year for 30 years, um, you basically end up with like 4. 5%.

So, you know, that's a lot more kind of guaranteed lifetime spending and then you add social security on top of that, then you get actually some pretty good results. Um, but that's probably a little extreme for most people. And I think we'll talk about the drawbacks, but it is kind of a cool idea in theory. And we also looked at what happens if say you do a tips ladder, but also add some equity on the end so that way you know you do have something left over at the end. Um, and we found that also is could be kind of an attractive strategy. Maybe it's not something you want to do with your entire retirement income, but potentially if you can cover some like basic cover living costs um that way, it could be an interesting way to approach it. — Okay. So, let's talk about those drawbacks with the tips ladder. Um, academics love tips. My bogalheads friends love tips. But what are the main disadvantages to that uh tips ladder? Yeah, with the tips ladder, if you're doing a 30-year ladder and kind of putting all your eggs in that basket, you're kind of locking in to that strategy, like you're not really giving yourself a lot of flexibility. Um, so that's one thing. The other thing is at the end of the 30-year period, your account balance is going to be zero. — You're kind of you're going all in on retirement spending um and not going to have anything left over um at the end, which, you know, a lot of people might prioritize. Um, so that's why I think if you're thinking about a tips ladder as part of your retirement income strategy, you want to lock in something without going the A word route, you know, maybe the tips ladder is an interesting way to do it. — Okay, so let's talk about the A word, the annuities. Um, another product type that academics tend to really like in terms of enlarging retirement income. A lot of consumers really don't love annuities maybe because of the high cost and transparency. But let's talk about the annuities that you examined in the paper. You didn't get into the ones that are more complicated and have those really high fees attached to them, right? — Yeah. They can come in a million different shapes and sizes and customized. And so we we've stuck with the very simple ones. either immediate income annuities where you know you're classic you hand over a lump sum of money and you start getting uh monthly checks in the mail or deferred income annuities where you know you put up money now but in uh around age 85 you would start actually getting the payouts. — Okay. So um as with delaying social security you found that um buying some sort of an annuity does help enlarge lifetime income but it's not a free lunch. So can you talk about the tradeoffs of that annuity allocation? — So right now um it's an interesting time because when we look at just basic income annuities and when we looked at kind of the rates you were getting now they were decently higher than our forecast for fixed income. So if you're funding a portion of your fixed income portfolio or using fixing portfolio to buy an income annuity, you're actually boosting your um income by a decent amount. And we found that actually did help um with retirement spending and also because you know if you take out 10% of your fixed income portfolio and then rebalance the rest to keep it at 4060 essentially your equity weight still going higher. So you actually do have higher lifetime ending balances too. So the immediate income in annuities do look pretty good right now on that lens. — However, the trade-offs are yeah there's once you're in your money's gone. Um, so you could, you know, there's not a lot of liquidity there. So you are kind of like locking into that, right? And then the other thing with annuities in general, the longer you live, the better bang for your buck you get. Like a deferred income annuity, if you're waiting for it to kick in at 85, if you look at life expecties, there's a 50% chance you won't have it. So you gave up money for something you might not need, but that's another drawback. And, you know, that depends on your own health circumstances. But I think in general like yeah there's no government backing there's no CPI adjustment like there is for social security you can buy cost living adjustments which you know will decrease your income but again if CPI is higher um you're not going to keep up with it there. — Okay. And unlike tips and social security you're not backed by the full faith and credit of the US government which Yeah. Okay. So um we're going to turn the tables a little bit. I contributed to the research as well. So Amy, you're going to lob a few questions at me about some sections of the paper that I worked on. — Right. So you added a section to the paper, I think it was last year that talks about how people can best use this research and we touched on some of the ways that we think people should not use it like but you know changing their spending rate every year. But can you talk a bit more about some of the best ways that people can apply this research? Yeah, a couple of things, Amy. One is I would say anyone can use it as a little bit of a temperature check. Adviserss can use it in this way with their clients. And I think back to when we first worked on this research in 2021 as a really good example of how this might work in practice where when we

looked at our forward-looking estimates for the major asset classes, we had very low fixed income yields. We had pretty high equity valuations. inflation was starting to flare up a bit during that period. And so our initial conclusion was, well, if you want to hold your withdrawals kind of static on an inflationadjusted basis for a whole 30-year period, you should probably be a little bit circumspect with those initial withdrawals. You'd want to be a bit riskaverse. So 3. 3% was our initial conclusion. Today I think we would say well conditions are fairly normal for new retirees. At other points in time especially if we do see um maybe stocks lose a bit of ground and valuations get more attractive we will be more uh willing to raise our base case safe withdrawal rate. So, um I think people can kind of use it as a way to help guide clients, give them a sense of is this a time when you should be prepared to step on the gas with your retirement spending or should you step off the gas and be prepared for some more difficult times for your portfolio and in turn your retirement spending. So, that's one way. And then the other I think excellent use of this research is just to talk to clients about what their aims are for their retirement spending. Are they the ones who really want to maximize their lifetime spending? Are they kind of the last breath, last dollar clients who don't care as much about bequests or are they very much bequestminded? what is their attitude toward varying their portfolio withdrawals using some of the dynamic strategies that you employ um or that you discuss in the research Amy or maybe sticking with a more or less static spending system. So kind of getting a temperature check um from clients with what they're looking for with their retirement spending and really what they're looking for their lives. So I think those are um the big use cases and certainly bringing the whole thing together with uh Jason's contributions in the research where you are thinking of this as kind of a mosaic. You're factoring in social security certainly you're factoring in whether annuities might be appropriate to help meet especially your fixed spending in retirement. That's helpful. Thank you. You also wrote an article recently about how required minimum distributions RMDs relate to withdrawal rates. Can you talk a bit about that? — Right. This is the main question I get in the realm of safe withdrawal rates. I don't know if you two have encountered it, but certainly with consumer audiences, there's invariably a hand will go up and someone will say, "Wait a minute. The numbers here that you're talking about with your safe withdrawal rates, they're higher. they're lower than my RMDs um prompt me to spend. And so people are concerned that RMDs might somehow cause them to overspend. And what I would say is when you stack up our safe withdrawals uh in our base case relative to RMDs, the RMDs are actually a little bit more conservative than what we would say people could reasonably spend. And the reason is that the RMD system does give you a little bit of a longevity edge relative to what you actually have. So they don't know who else is living there in your household and might be reliant on that portfolio that you're spending from. And so they effectively spot you an additional 10 years in terms of your personal life expectancy. So my main takeaway and something I would urge um adviserss to talk through with their clients is that RMDs are pretty safe. They may not be livable in terms of uh an actual spending system because they do jostle you around a little bit, but um RMDs will typically not cause you to prematurely exhaust your portfolio balance. So, I think that's an important part of the discussion here because most people are drawing the majority of their portfolios from or withdrawals from their uh tax deferred portfolios which are currently subject to RMDs. — Right. You've also written about the impact of spending shocks, things like early retirement or um big expenses for long-term care later in life. What are some of the best ways that retirees and adviserss can prepare for those types of issues? Yeah. Um I was surprised when I was initially hunting around for the average retirement date in the US. It's lower than people might think. it's uh 62 according to a Mass Mutual survey of a lot of uh retired people. And so I think people need to be prepared for that shock of early retirement. It might

be um that someone has a job that's physically difficult to do longer, maybe some sort of health shock or the spouse might have health issues. So there are a lot of reasons that can cause people to retire earlier than they expected. And the net effect of that in terms of retirement spending is about what you would think. If you are withdrawing over a longer time horizon, it necessitates a lower starting withdrawal. All else equal. So 3 and a half% is the safe withdrawal rate that corresponds with a 35 year time horizon in contrast to that 3. 9% base case. Um so I think that's an important thing to talk through with clients. What is our plan if one of you uh needs to retire earlier than expected or both of you want and of course there can be happier reasons that people retire early where their portfolio may have performed really well as well. So it's I think an important aspect of the discussion that advisers ought to be having with their clients. And what about on the long-term care side? Yeah. So, that is uh a topic that I'm obsessed with because we had a long-term care need in my family with both of my parents needing paid long-term care. It's effectively a balloon payment at the end of life. So in the research, Tao who works with us on all of these calculations modeled in what if we had to double the retirees spending in the last couple of years of life, which is kind of a typical scenario with many retirees. And the implications were sobering. If you wanted to kind of model that into your safe withdrawal, your initial safe withdrawal, again, the um starting safe withdrawal rate in that instance where you're assuming these two years of very elevated spending at the end, it would require a three and a half% initial spend. Again, assuming a 30-year horizon. So, fairly sobering. And that's one reason why I would urge people to not do it this way. that actually I think a better model if you haven't purchased long-term care or if your clients would be to think about setting aside a separate bucket for those long-term care costs. And that way your spendable portfolio is indeed something that you can look at in terms of calculating a safe spending rate. um and you know that you have sort of this mental accounting going on where you have set aside the money for those long-term care expenses. — So um we are going to be taking some of your questions um but uh we wanted to um turn to uh some closing questions for Amy and Jason. Um Jason, I'd like to turn to you and really ask both of you. Um are there any additional areas that you'd like to delve into with this research? Just are there any topics that have occurred to you that we should be spending more time on? Jason, let's start with you. — Yeah, I think the tax implications are an interesting one. That's one I get reader emails about. They love a tips ladder, but they don't like paying taxes, and tips are taxable income. So thinking about ways we can, you know, emphasize after tax returns in retirement income could be really interesting to look at. — Yeah. Amy, how about you? Um, I think one area I would like to look at would be um quantifying the impact of uh exactly how volatile spending can be with some of these flexible spending methods. Right now, we use the standard deviation of cash flows in year 30 as kind of a proxy for how much spending might change, but I think it would be helpful also to look at kind of the dollar value of spending over time in different scenarios and how that might change. Mhm. — Um I also saw an interesting paper that came out recently that looked at a strategy where you would combine a tips ladder um that could kind of cover your essential spend spending with uh portfolio of 100% stocks. Um so you know still being able to cover your essential needs but also potentially having much more growth potential. So I think that would be interesting to look at also. — Okay. And presumably if you have more of your fixed spending locked down with social security and maybe that tips ladder, you're more agreeable to change up your withdrawals based on how that remaining portfolio has behaved. Right. — Right. And you don't have to worry as much about some of the issues we talked about earlier like sequence of returns risk or getting hit by high inflation early in retirement, right? Um, so this research, I sometimes joke it's

like all me search, all the retirement research. Um, so I'd like to ask each of you as you think about your own household's retirement plan, how has this research sparked you to think differently about your retirement. Jason, let's talk to you first. — Yeah. Well, I' I've hopefully got a few more years before I retire, but uh definitely makes me think a lot about the flexible strand flexible spending strategies and which one of those would be the most uh palatable to me. Um I am a little bit riskadverse. I get a little freaked out when you know my account balances drop 20% like in 2022. So just think about like which of the like guardrail approaches maybe would work best for me. It's something I've been thinking more about. And also then how social security impacts some of the flexible spending strategies. We looked a little bit about the impact on guard rails in the paper and found out we could actually smooth the standard deviations a bit because with the social security you can kind of keep up your standard of spending without having to necessarily take portfolio withdrawals at inopportune times. — Okay, Amy, how about you? Um, I would say I really like the probability based guardrails approach for someone who is interested in kind of maximizing lifetime spending with maybe some lifetime giving built into that spending during retirement. And um I think the value of that approach is you know obviously you can spend more um but I think by looking at your probability of success on a regular basis that's really the comes the closest to what a good financial advisor would be doing. You know um a financial adviser would never say you could take 4% of your portfolio and stick with that for the next 30 years. you know, the adviser would be reviewing the portfolio on a regular basis, you know, doing a comprehensive model once every couple years and then kind of fine-tuning spending along the way. — Um, I also do like the idea of using a t tips ladder for a portion of spending. And Jason, you wrote an article recently about this and I think the updated number that you used for a tips ladder would be 4. 8% 8% which looks pretty attractive. Better than 3. 9%. — Exactly. Um I'll just chime in. I say one thing that I've been thinking about is just while you're working, while clients are working, get them to be thoughtful about what expenses do they want to try to take care of while they're still working? Because I think this whole psychological hurdle of spending can be really challenging for people. So, if you can get those new car purchases out of the way, put a new roof on the house, any of those big ticket items that you can kind of tick off the list before retirement starts, it seems like just the whole retirement spending pro problem gets a little bit easier, even if it means that the clients aren't saving quite as much in those last years leading up to retirement. So, that's something that I've been marinating on. We are going to um be taking your questions but um wanted to put up a uh poll question here. Um we had asked all of you about topics that you'd like us to delve into in future iterations of the research. It looks like coming through loud and clear is that tax efficient retirement spending is very much on people's radars. We had a little section in the paper about the implications for um tax efficient retirement spending, but uh more to come on this. I think we all have an appetite to dig into this topic and there's certainly a lot of meat there. It looks like we're getting some questions about tax efficient spending, but I wanted to um talk about uh a question here. It's how do I calculate the withdrawal rate if I'm planning to retire early, which means planning for 35 to 40 years of retirement. Amy, do you want to take that? Yeah. So, we have a table in the paper that you can look at that kind of maps out um safe withdrawal rates by the length of retirement. So, you know, we go show what the numbers would be if you had a shorter than average retirement period as well as longer than average. And so, as you mentioned earlier, if you're looking at a 35-year retirement um period, the number would bump down to about 3. 5%. — Okay. And even lower for like the fire people. They would need to be even more conservative, — right? Okay. So, um, here's a question about asset allocation. Um, what's the downside of leaving 80% in stocks instead of bonds if we're not worried about income? So, let's discuss the role of asset allocation in all of this. — Yeah. So the issue with um having a heavy equity exposure is you know if you look at historical data obviously

um your returns are most likely going to be a lot higher. Um but the problem as Jason mentioned is the volatility on stocks is higher which means your potential return paths are landing in a bigger range. Um, which means if you are looking for a relatively high probability of success, um, you would be better off with, you know, leaning more on the fixed income side. But if you are someone who's comfortable with a lower probability of success and maybe, you know, making some adjustments along the way, um, you may be comfortable with having more equity exposure. — Okay. Um, here's a question. uh 4060 seems pretty sensible, but should we be concerned about bond defaults? And the question goes on to ask about stats on the average number and dollar value of defaults per year, which I don't expect you to have, but Jason, maybe you can talk about the complexion of someone's fixed income portfolio. What's advisable? And of course it depends on the client but um you know h for people who are concerned about defaults how should they shade the fixed income portfolio to shade it towards safety — probably towards like a core bond fund like I think that's what we use in our kind of modeling is something that's similar to like the Bloomberg at US aggregate bond index um something like Vanguard's like total bond market ETF. The investment grade ones are going to have very low levels of default. Even the high yield ones don't have as high of defaults as you kind of expect. Private credit might, you know, change all that in the next couple months. We'll see. But private credit probably shouldn't be a big part of anyone's retirement portfolio anyway, just given the liquidity and the risk. But I think if you're sticking with high quality bond funds and a very diversified basket of bonds, you don't have to be as worried about defaults. If you were doing individual bond purchases, then maybe I'd be a bit more concerned. But hopefully your adviser um is steering you towards either really high quality stuff or really diversified bond funds. — Okay. Um Amy, here's a question about RMDs. Uh you do examine the required minimum distribution system as a component of the flexible spending systems. Can you talk about how RMDs look from the standpoint of safe withdrawal rates and um cash flow volatility and other considerations? Yeah, you definitely are. If you follow kind of an RMD approach where it you're basically taking the portfolio value and dividing it by your life expectancy as you know published in that um IRS table, — right? um you are going to have the withdrawal amounts bumping around from year to year depending on um changes in the portfolio balance as well as you know your life expectancy gradually going down each year. Um so it does have one of the highest amounts of volatility in um in the dollar amount of withdrawals. Um but it does allow you to start out with a decent spending rate. But I think the number is 4. 7%. — Okay. Um, so Jason, you touched on this question earlier, but I'm hoping you can put a little bit of a finer point on it. So the question is, how is income generated in a portfolio in your research? How do what's our approach to spending income? Um, spending capital. Can you discuss that the base case assumption? — Yeah, so we're focusing on a total return approach. So income plus capital appreciation. Um but the income alone isn't going to be enough to kind of make up for that withdrawal rate. So we are going to pull from the portfolio um to make up for whatever the income doesn't deliver in terms of you know meeting our safe withdrawal rate. — Okay. — So we are depleting the portfolio. — Okay. Um so Amy question for you on the methodology with the flexible strategies. um if someone's using one of the flexible strategies or as you work on this research, how do you determine the withdrawal rate for subsequent years after the initial year? And maybe you can give us an example of one of the simpler strategies, not maybe the guardrails system, but something that's a little easier to calculate. Yeah. So, if you're using the base case of fixed real withdrawals, you're using u the 3. 9%age to determine your initial spending amount. So, if you're starting with a million-doll portfolio, it would be $39,000. And then each year after that, you would be adjusting that dollar value for inflation. And with the other um spending methods, you're also in many cases starting out with the previous year's dollar value of spending and then adjusting that. Um the exceptions would be the endowment method and constant percentage

where you are recalculating the number um using a percentage each year. — Okay. Um so here's a question. I'm not sure if you've delved into this one previously, Amy, but the question is, what are your feelings on using a flexible withdrawal strategy where you withdraw more money when portfolio returns are above market, like the last several years, and decrease withdrawals during years of below market or negative returns. I think that's kind of the intuition behind all of the flexible strategies, right? Or nearly all of them, — right? And I think, you know, it's an approach that makes sense that um because of issues like sequence of returns risk, if you're fortunate enough to have a period of really strong market performance during the first few years of retirement, you can afford to spend more, especially once you get out of that kind of danger zone of the first five years of retirement. So, um, here's a question for you, Jason. It says, "It seems like Morning Star is really averse to recommending adding annuities to the portfolio. " Um, so why is that given that our research shows that it enlarges lifetime spending? And I wouldn't I actually wouldn't say that you're at all averse to the idea, but maybe talk through the trade-offs. Yeah, I think it's a tool in your toolkit and I think if you're working with a financial adviser who can help you understand kind of the implications and help you pick the right uh product, the right income annuity, then yeah, it could absolutely help you in retirement. So, I wouldn't say we're like totally adverse to it by any means, but I do think for uh you know, a lot of people maybe the trade-offs of having to lock up that much money a lump sum immediately um maybe that won't be worth it in the end. you know, maybe you might get some FOMO if you give up a lot of your portfolio and all of a sudden you get a really good stock and bond market. Um, but I do think, yeah, the annuities, the real benefit is the longer you live. Um, then you really get a lot of bang for your buck out of them. Um, so I wouldn't say we're like very adverse at all, but I'd also say they're not, you know, necessarily something everyone should have or needs to have, but I think if you're working with a financial adviser who can help you walk through kind of what the trade-offs are too for your own circumstances, um, then it could be a really useful tool. — Okay. What do you think about the use case of someone using social security plus an annuity to help meet their fixed expenses? Do you like that strategy? And I think the hard part is there is like knowing your fixed expenses in advance. But if you can get a really good idea of like what you know you have to pay off in your mortgage or what you want to spend on travel a year. Um, if you can really come up with a good financial plan with your advisor on your own and really stick to that, then yeah, if you cover that, that's probably a really great way to kind of one give you peace of mind, help you sleep at night, and then two, you have a lot of um, you know, extra money to play with for things like, you know, if you want to do a big spend or want to be able to give something to your children while you're still alive, — right? — Yeah. — Which is a great strategy, I think. Okay. Um, here's a question about asset allocation. And so the question is instead of a 4060 allocation, what about foregoing bonds and just going with three or so years of treasuries and the remainder in a diversified stock portfolio? Um maybe this me minimizes sequence of return risk but may not fully address a lost decade. Trying to think keep things as simple as possible is the comment from the person watching. So let's talk about asset allocation and three years of treasuries. Does that sound like enough uh or does that seem like an overly risky portfolio for many retirees? — I think it is on the riskier side and um you know there has been kind of this buzz about a paper that was published by Scott Cedarberg advocating — keeping all of your assets in equities as you're saving for retirement and also during retirement. and you know he looked at what your results would have been historically and found that you could have done much better with 100% in stocks. I think the problem with that approach is we don't know if the future is going to be like the past. Um, and you know, as we've talked about uh earlier, if you have a heavy equity position, you have a much bigger range of outcomes, which means there's a higher chance that you're going to start running out of assets later in life. Um, so I think the questioner is right on in saying, you know, you have the first couple of years of spending covered if you do have that fixed income position carved out. — But if you do end up if you run into a period like, you know, the 2000s — y — where equity returns are flat or negative over a long period, you could really be in a bad situation.

— Okay. It seems like the kind of thing that's much easier to get comfortable with after 16 years of a bull market. But if you remember, we had two 50% draw downs between 2000 and 2009 than it's probably not the kind of study you would see in 2010. Yeah. Here's a provocative question. Can you please talk about some of the expenses or risks which are constantly underestimated or not even considered in retirement planning? Long-term care is one. What about others? I'll add one here. Um, and I'll lob the question to you and Jason, you and Amy and Jason. Um, I think that healthc care inflation is another uh factor that um specific line item we know in older adult households tend to tends to be higher than for um the population at large and health care costs have been running higher than the general inflation rate. So, if it's a bigger line item in your budget, that means that your personal inflation rate could be higher. That's one that is top of mind for me and I think makes inflation protecting the retirement portfolio mission critical. Are there any other ones that you two think about? I would point to some of the miscellaneous taxes, things like — Irma. Yeah. uh net or nit and Irma net investment income tax which could impact um wealthier retirees in particular. — Yeah, that's why good tax planning advice is really important in this. How about you Jason? — I think healthcare I think you nailed it. I think that's kind of the biggest one that's probably on everyone's mind and probably has the biggest impact just given how one you can't really forego it. Um so you are kind of going to be having to deal with it. — Okay. But I would say overall, you know, as you have written about extensively, a lot of people really underspend, right, — in retirement. And I think that's one of the big benefits to working with a financial adviser is if you can work with a good adviser and get some peace of mind that yes, you do have enough money and you can afford to do things like you'd re, you know, go on a nice vacation with the extended family or do something that is really going to add to the quality of your life. I think that can be really valuable. — Permission to spend. — Exactly. — Yeah. — Um, so here's a good question. Can you point out any tools or resources to help us adjust some of these safe distribution rate methodologies to accommodate different retirement durations? I'll throw out a couple. Um, for professionals, I think income lab is a really good tool. In fact, Derek Tharp, who is um someone who's on the income lab team, helped us sort of look at the one of the flexible strategies in your um part of the paper, Amy. And then for consumers, I like Balden, uh, formerly New Retirement. Uh, it has some really cool tools for modeling out retirement income. Do either of you have any favorites beyond those? — Um, no. I've also heard good things about Balden, though. — Okay. Um, so here's a final question. Um, how should a person's tax deferred portfolio be invested once that individual is taking RMDs? Should it be largely in fixed income or still have a significant equity component? I'll tackle that. And um I think it should generally be a balanced portfolio. I don't see any reason that you would need to completely lock it down that um some combination of income distributions and rebalancing proceeds and an element of cash in the portfolio in case neither of those are cooperating. um should be the complexion of most tax deferred portfolios in my opinion. So I think that is going to uh be our last question for today. Amy and uh Jason, I want to thank you so much for being here. And before we close today, I want to provide a URL that you can use to access our research. It's a 50 plus page white paper. So um be prepared. I'd also like to mention our 2026 investment conference which is coming up in June. I'll add that June is one of our most delightful months here in Chicago February. Actually, not bad today, but not the best some of the time. You can find a link to register for the conference in the attachments tab on Bright Talk or in the comments section on LinkedIn. We'll put in that registration link. Thank you so much for taking time out of your schedule to join us today and we'll see you soon on morningstar. com where Jason, Amy, and I and the rest of our Morning Star team are regularly posting content. Have a great day everyone.