Anyone who held money in the stock market in March 2020 likely panicked when there were multiple drops in the Dow Jones Industrial Average in the 3 and even 4-figure daily closings. But for those who were on the brink of retiring, the sting of these losses may have even been life-changing – especially if part of your retirement income strategy was based on using the safe withdrawal rate to draw down funds from your portfolio.
Why Yesterday’s Safe Withdrawal Rate Won’t Likely Work for Today’s Retirees
Many years ago, “traditional” financial advisors would often rely on a concept known as the 4% Rule. This involved taking 4% of a retiree’s portfolio to use for income purposes and leaving the remaining funds in the account(s) to continue growing over time.
In this case, inflation could also be factored in, which resulted in a slightly higher withdrawal rate. This could often continue until all of the assets in the portfolio had been withdrawn. As an example, if a retiree started out with $1 million, and withdrew 4% – or $40,000 – in the first year, inflation would be considered in the following years.
Still using this example, then, in the second year, $40,000 times an average annual inflation rate of 3% would result in the dollar amount of the second year’s withdrawal being $41,200.
Year 1:
$1 million X 4% = $40,000
Year 2:
$40,000 X 1.03 (using 3% inflation) = $41,200
In the past, a portfolio that consisted of approximately half equities and half bonds had a high probability of success and could possibly continue in-tact for twenty or more years. But fast forward to today and you will find that things are quite different.
There are several reasons for this, such as:
- Increased volatility in the stock market
- Historically low-interest rates
- Longer life expectancy
Given all of these factors, it is much more probable that a retiree would run out of money while the funds were still needed. In fact, even using a safe withdrawal rate that is in the range of 2.8% could be risky, based on how long the retiree lives and the amount of money they need to access from their portfolio.
A Solution to the Safe Withdrawal Rate
The good news is that there are strategies available that can help you to generate an ongoing income stream without the need to worry about stock market returns or the interest rates on bonds or other fixed investments.
This involves using a fixed or fixed indexed annuity. These financial vehicles are designed for paying out a set amount of income for either a predetermined period of time – such as ten or twenty years – or even for the remainder of your lifetime, regardless of how long that may be.
Fixed annuities can provide you with a number of guarantees, which in turn, can provide you with a financially worry-free retirement. In fact, knowing that your income will arrive regularly, you can focus on other more important things, such as spending quality time with friends and loved ones.
Is an Annuity Right for You?
Even given all of their nice features, annuities may not be right for everyone. So, if you would like to determine whether or not an annuity would be a good fit for your portfolio, we can help. At Annuity Gator, our mission is on educating people about how these financial vehicles work, and how they could be integrated into your overall financial and retirement plan.
Still have questions about annuities?
If so, feel free to reach out to us directly by calling (888) 440-2468 or by sending us an email to our secure online contact form. We look forward to assisting you with your customized retirement income strategy.
