Inflation is at a 40-year high and workers need to plan for a retirement that could last more than 30 years. This brings us to the next question: does the 4% rule for retirement spending still work in the current environment?
A panel of financial experts discussed the challenges of planning for retirement today and the relevance of the 4% rule in a webinar on Wednesday.
“Planning for retirement has never been more difficult than it is today,” said David Lau, Founder and CEO of DPL Financial Partners. He pointed to the triple threat of Americans today living longer than previous generations, people retiring earlier than expected, and fewer and fewer people having pensions. “All of this is a real challenge when a client has to self-fund a retirement that can last 30 or 35 years.
“There’s no way to describe how terrible this year has been” looking at the performance of various asset classes during the third quarter of 2022, said David Blanchett, adjunct professor of wealth management at the Institute. American College.
He noted that bonds can no longer provide reliable income as they once did. Additionally, retiring in a bear market can derail a retirement plan, putting a retiree at risk of depleting their portfolio while still needing income. Anxiety about running out of money during retirement can cause retirees to underspend their retirement savings.
“Of all the times people need help, that’s an example,” he said.
The 4% rule is a rule of thumb that suggests that retirees can safely withdraw 4% of their savings in the year of retirement and then adjust for inflation each year thereafter for 30 years. But panelists said the traditional “safe removal” rule doesn’t necessarily work in today’s environment.
“Four percent isn’t a bad place to start,” Blanchett said. “The problem is that it’s an incredibly generalized rule. It should be a very basic starting point, but it’s used more by advisors today than it ever was.
Lau gave some of his objections to the 4% rule.
“The 4% rule is not meant to be a pension plan. It’s supposed to be the guideline of a retirement plan,” he said. “It’s supposed to be part of the retirement plan and provide guidelines on how to take income out of the portfolio. The 4% rule does not take into account your client’s risk tolerance. And finally, you can’t have a strategy built around just one aspect of a person’s retirement: their portfolio.
Another Retirement Risk: The Bear Market
The risk-return streak is one of the biggest risks in retirement, Lau said.
“If you’re retiring in a bear market, that’s a problem,” he said. “If you’re retiring in a bull market, that’s a good thing. You can have very successful clients who have done all the right things, but if they’re retiring in a bear market, that’s a big deal.
He gave the example of two retirees: one who retired when the market was down and the other who retired three years later when the market was up.
“If a person who retired in a bear market and had run out of money had retired three years later in a bull market, they would end up with more assets than they had when they started” , did he declare.
Components of Modern Retirement Planning
Retirement has evolved over the years, with everything from interest rates to changing complexity, Lau said. Retirement planning strategy has also evolved to keep up with these changes, with the traditional shift from stocks to bonds and funding retirement from yields evolving towards the current strategy of staying in stocks and having to sell capital. to supplement yields.
“Now your client has to go into much riskier investments to fund their retirement,” he said. “The complexity is very high. The execution risk of delivering a 4% drawdown is a very complex way to generate income. The shares were not designed to generate income. Previously, variability was low – you knew what your income would be. Now the variability is high. Your client’s income now depends on the market. But the fact that this is the premise of their entire retirement plan doesn’t sit well with many people.
Another issue that can throw a wrench into a client’s retirement plan is having to retire earlier than expected.
Blanchett said the average American is retiring three years earlier than expected.
“If your client plans to retire at a certain age, but then has to leave the workforce due to ill health or a layoff, the outcome can be devastating,” he said. declared.
Annuities could be an answer
Stocks often replace a pension in many retirement portfolios. But annuities might make more sense, Lau said.
“Annuities fund retirement income more efficiently than bonds,” he said. He showed an example of how annuities compare to bonds in funding an income stream.
“Annuities have both low asset volatility and low income volatility,” Blanchett said.
Susan Rupe is an editor for InsuranceNewsNet. She previously served as communications director for an association of insurance agents and was an award-winning journalist and editor. Contact her at [email protected]. Follow her on Twitter @INNsusan.
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