Retirement planning has become all about the income, as in how much and for how long.  Last year the Journal of Financial Planning conducted extensive research into retirement portfolio withdrawal rates. They concluded the traditional 4% rule was too risky because it leaves a retiree with an 18% chance of portfolio failure; that’s about a one in five failure rate.   

Portfolio failure is another way saying “sorry your money is all gone”.  Very bad news to someone in their 70’s potentially looking at many more years of life by surviving only on Social Security each month.   

What is the new safe withdrawal rate?

• 2.52% According to the Journal of Financial Planning.

Let’s be clear retirement money that is invested in equities; stock market, mutual funds, ETF, variable annuity etc. has an 18% chance of failure if the retiree withdraws more than 2.52% per year.

What is the solution? 

With interest rates hovering around 1% certainly not bonds or certificates of deposit. 

That leaves fixed annuities because they can insure a retirement income for life.  But their rates are also low and the income is sometimes level with no chance of increase. 

Enter the time tested fixed index annuity with income options.  An indexed annuity can offer a guaranteed withdrawal percentage increase, meaning each year you own an indexed annuity the percentage you can withdraw goes up; some as high as 7%.   

Let’s compare the recommended 2.52% equity withdrawal and 7% index annuity withdrawal using a nice round figure like $100,000.

2.52% of $100,000 in equities is $2520 per year.

Whereas the annuity’s 7% withdrawal is $7000 per year and this $7000 could go up each year if there is an index interest credit and once it goes up, it is guaranteed to stay up. 

The choices are:

• Unsafe withdrawal using the antiquated 4% rule and risk running out of money 1 out of 5 times. ($4000 per year)
• The new “safe” 2.52% rule ($2520 per year)
• The insured, guaranteed 7% index annuity ($7000 per year)

Which would you prefer?

For help you may ask questions in the comments or contact me privately here:

Tim Barton

Chartered Financial Consultant