You might have heard that the 4 Percent Rule, otherwise known as the Prudent Man’s Rule, is a safe way of determining your withdrawal rate from stock market accounts during retirement. Well, this may not be true.
The Prudent Man’s Rule suggests that you could take 4 to 5% out of your investment accounts per yearwithout risk of depleting the account within your lifetime. Consider our current economic state. Now consider your retirement during this economy. Where do you and your finances fit in this scenario?
A recent essay, written by Wade D. Pfau, PhD, entitled, “Can We Predict the Sustainable Withdrawal Rate for New Retirees?” illustrates a study that “attempts to predict sustainable withdrawal rates by quantifying whether a 4 percent withdrawal rate can still be considered safe for U.S. retirees in recent years when stock market valuations have been at historical highs and dividend yields have been at historical lows.”
Pfau states, “I find that a regression model using market fundamentals can explain historical MWRs (maximum sustainable withdrawal rate) fairly well, and that the 4 percent rule is likely to fail for recent retirees.“
During the last years that you are an employed, income-earning worker, the events that take place in financial markets become more significant.
You might depend on these events for the health of your retirement.
If you recently retired, you’ll need to think about your rate of withdrawal from your accounts and whether you’ll be able to continue on that course without ‘paring back.’ But retirees shouldn’t have to depend on this unpredictability for income because it will never be predictable! Fill out asurvey or call us to find out why and how you don’t have to depend on an unpredictable vehicle for income in retirement when you can depend on a very secure vehicle to give you a guaranteed** income stream.
As Pfau states, “it would be a great pity if recent retirees scaled down their retirement expenditures and lived a more frugal lifestyle only to find at the end that a higher withdrawal rate could have been sustainable.” This is why I am here.
The 4 Percent Rule “cannot be considered safe in light of the unprecedented market conditions of recent years.”* A three year CD is yielding 1.16% and a ten year treasury, 1.78%.
If you are in your 60′s, the right annuity could be structured with a six to eight percent income stream and you would still have control of your money. Instead of taking a chance withdrawing less than four percent, where income is not guaranteed* for life, consider the alternative: a fixed index annuity with six to eight percent annual withdrawals and guaranteed* income for life, income youcannot outlive*.
The graph below shows an Index Annuity return in blue and the S&P 500 return in brown. Notice how the blue bars, Index Annuities, are never negative like the S&P 500. If you are pulling money out of the market while the market is going down, the consequences can be detrimental, because the percentage withdrawal becomes higher and higher. And when your account declines right before you are about to retire, the far-too-short time you have to recover can be even more detrimental.
Considering the 4 Percent Rule while calculating your potential withdrawal rate during retirementcannot compare to guaranteed income you cannot outlive.
I explain it all in my video, which you can find just about this article.. You’ll see it plainly on the whiteboard, how making a few shifts in the placement of your assets in alternatives to investments, such as annuities, can allow you the freedom to implement the prudent man’s rule and take out the income you need.
You just want to know that you’re pulling that money from the right place before you make a move.
You can fill out a survey here on our site and one of my licensed insurance agents, and hand-picked, top income planning specialist will get in touch with you. Or, if you want immediate attention, you can call us at (619)291-1233.
It doesn’t matter which approach you take because the ultimate result is the same. You will be in touch with one of my top income planning specialists, who will then assess your particular financial scenario.
My income planning specialists have been highly trained to treat each client and their situation with the uniqueness they possess. We will provide you with a personalized Income-For-Life Illustration, and you will also get a package of my educational eBooks, so you can learn even more! The education never stops. This is just the beginning, so get in touch with us right away!
*Financial Planning Journal, www.fpanet.org, October 2011 issue.