Morningstar has released new research that identifies a lower safe withdrawal rate for retirees in Japan. For this research, Morningstar defined a safe withdrawal rate as the amount a retiree can withdraw each year while safely expecting their savings to reach the end of retirement. The paper, “Safe Withdrawal Rates for Japanese Retirees Today,” finds that Japanese retirees using a traditional 4% withdrawal rate against their initial retirement savings are at increased risk of experiencing a shortfall in their capital.
Against the backdrop of rising longevity and low investment return expectations in Japan, Morningstar identified a safe withdrawal rate that accounts for the unique market conditions faced by retirees in Japan today. Morningstar’s research identified a safe Japan withdrawal range beginning at 2.5% or 3%—less than the frequently used 4% rate.
“The investment industry has long referred to a safe withdrawal rate of 4 per cent and we wanted to find out if this is a reasonable assumption for current retirees in the Japan,” Katsunari Yamaguchi, Chairman for Ibbotson Associates Japan, an affiliate of Morningstar and co-author of the report, said. “Most studies on the topic have been conducted for U.S. investors using U.S. data, and it was increasingly dangerous to leave this assumption unchecked given Japanese investors differ from their U.S. counterparts in terms of personal characteristics, typical investments, and basic old-age government benefits. Therefore, estimating a Japan-relevant safe withdrawal rate based on our current return and risk expectations for Japan is key to helping those individuals manage their retirement savings.
“The generous investment returns of the last century that supported a comfortable and long-lasting retirement portfolio for previous generations of retirees are no longer with us,” Yamaguchi continued. “In the current environment of low yields, clients and their advisers need to set realistic return expectations. We hope this analysis provides advisers with a framework to use with clients when considering the question of retirement spending.”
You can read the full paper here.
