4% rule / annuities / retirement paycheck / sequence of returns

Forget the 4% guideline in these low interst rate times

Based on past investment returns a 1994 study found one could expect their retirement assets to last 30 years if they took out no more than 4% each year, adjusted for inflation. If you aren’t familiar with the 4% guideline for withdrawing assets in retirement, search for 4% rule in this blog. The problem with following this guideline today is that interest rates on bonds and stock returns are much lower than when the study was conducted.

The 4% rule doesn’t apply in today’s low-interest world, said retirement researcher Dr. Wade Pfau who is the author of several books on retirement planning and spending.

“The 4% rule is a rule of thumb that says you can withdraw 4% of your portfolio value each year in retirement without incurring a substantial risk of running out of money.” “But interest rates are so low today that’s it’s tough to get up to the 4% withdrawal rate without risking running out of money,” Pfau said.”
“Low interest rates are not the only risk to clients’ retirement today, Pfau said. Significant market losses as well as continuing market volatility and uncertainty also can destroy a client’s retirement portfolio. In addition, sequence of returns risk – or the timing of withdrawals from a retirement account – also is a factor in a client potentially running out of money. Withdrawing money early in retirement during a down market means that a retirement account balance may never recover.”
Pfau listed four ways to manage volatility and longevity in retirement. They are:
1.    Spend conservatively.
2.    Spending flexibility.
3.    Reduce volatility.
4.    Use buffer assets – avoid selling at losses. Examples of buffer assets are cash, cash-value permanent life insurance and a line of credit on a reverse mortgage.

Annuities can be a good way for retirees to overcome low interest rates, Pfau said. “Annuity mortality credits are not affected by interest rates, and that makes annuities attractive in the low-interest rate environment,” he said.
Putting some of the retirement portfolio in an annuity can enable retirees to increase their withdrawal rate while managing risk, he added.

Get the details from writer Susan Rupe: https://insurancenewsnet.com/innarticle/low-interest-rates-challenge-retirement-investors#.Xqjgq5l7mCg
Source: Financial Planning for Women