Morgan Stanley updates retirement models after planning flaw

Morgan Stanley announced this week it will change how it models retirement income after identifying a common flaw that can understate the risk that retirees will deplete their savings. The firm said it will update the assumptions and the software advisers use to build retirement projections.

The flaw arises when plans assume a fixed withdrawal rate or steady returns. Those static assumptions can mask the impact of a large market drop early in retirement or of prolonged low returns. Sequence-of-returns risk refers to weaker investment returns occurring early in retirement, which makes a given withdrawal rate more likely to exhaust a portfolio.

The revisions will place greater emphasis on variability in returns, the order in which returns occur, longer life expectancies and higher potential inflation. Morgan Stanley plans to add stress tests, model sequence-of-returns scenarios and allow withdrawal rates to adapt to market conditions. Advisers will re-run client plans and provide revised guidance when projections change meaningfully.

The updates will be rolled into the firm's in-house planning platform and into adviser training. Morgan Stanley expects advisers to begin using the updated tools with clients in the coming months and will prioritize people closest to or already in retirement. The firm did not provide a precise timeline for a full rollout or a count of how many client plans will be reworked.

A Morgan Stanley spokeswoman said, “We are updating our planning models to reflect how volatile markets, longer lifespans and rising costs can affect retirement income.” She added advisers will combine tougher downside scenarios with guidance on phased withdrawals, rebalancing and consideration of guaranteed income options.

The change follows increased scrutiny of the traditional 4% rule and other fixed-rate withdrawal frameworks. Financial advisers and academic researchers have highlighted sequence-of-returns risk and the effect of low bond yields on future expected returns. Morgan Stanley's update aligns planning assumptions with scenarios that model those risks more explicitly.

Under the new approach advisers will present multiple outcomes rather than a single point estimate. The models will show severe market downturns and prolonged low-return periods, and will illustrate how changes to spending, asset allocation or the timing of Social Security can alter a plan's odds of success. The firm also expects advisers to discuss longevity insurance and other guaranteed income solutions where appropriate.

Morgan Stanley did not say it will recommend lower equity allocations for all clients. The firm described the approach as more dynamic, adapting to each client's goals, risk tolerance and changing market conditions. Several other wealth managers have broadened scenario analysis and, in some cases, adopted more conservative return assumptions.