Funding Retirement In Post-4% Rule World – ValueWalk Premium
history of the u.s market Safe Withdrawal Rates

Funding Retirement In Post-4% Rule World

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history of the u.s market Safe Withdrawal Rates

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William Bengen’s widely cited research found that retirees could expect to withdraw 4%, after adjusting for inflation, from an asset annually. He arrived at this safe spending rate by building a hypothetical 50/50 portfolio (source: Vanguard) and testing it using every 30-year period from the seven decades prior to 1994. Bengen showed how an income stream could be safely sustained for 30-plus years (the assumed length of retirement plus some).

Since 1994, when Bengen published his research, we’ve detonated the dot bomb of the early part of this century, popped the housing bubble of ’08 and now are riding a market to ever higher historical highs like a drunken cowboy trying not to chuck his beer as he dips, bucks and spins on the robot bull. Underpinning this euphoric 10-year bull ride is a Fed-driven regime that has artificially suppressed interest rates. We’re in uncharted waters.

Client expectations versus the 4% rule

A recent survey from the American College of Financial Services found seven of 10 respondents of retirement age were unaware of the 4% safe-withdrawal rate. Approximately 16% of respondents pegged that number between 6% and 8%. Imagine telling a client that the $40,000 in retirement income they planned to spend annually would be more like $20,000. Or $10,000.

Given these meager assumptions, it’s time to think differently about building sustainable retirement income streams. Since many retirees fund their retirement using a traditional IRA, it makes sense to use a portion of that asset to fund a variable annuity with a guaranteed living withdrawal benefit (GLWB) that ensures an income stream of at least 5% or 6% of the invested principal. With an IRA, retirees are already paying ordinary income taxes on the withdrawals. Tax treatment would remain the same.

But annuities are terrible, right?

Many advisors will ask, “But what about expenses? Those guarantees cost 4%, and lockup periods are very long and expensive. My client doesn’t want to annuitize. Annuities are so hard to understand, layered with other fees, and they force really conservative allocations or they’re not safe enough. I can’t bill on those assets or see them in my portfolio management system.”


So-called “next-gen” no-load variable annuities with GLWBs aren’t like that:

  • They don’t pay commission;
  • They don’t have lock-up (surrender) periods;
  • Fees are low (20 – 65 basis points in mortality and expense fees, and up to 125 basis points for the guarantee)
  • They may not force annuitization;
  • They’ve been simplified and offer more investment choices when compared to traditional commission-based annuities;
  • They may allow equity exposure of up to 80% for folks who want or need to potentially grow those assets further;
  • Some allow for fees to be drawn directly from the asset without impacting the withdrawal (or “benefit”) base; and
  • Data feeds through DST, DTCC and others make them visible on favored RIA technologies

Read the full article here by David Stone, Advisor Perspectives

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