When a 5 percent withdrawal rate is better than a 5 percent interest rate or gainArticle added by Karlan Tucker on April 13, 2012
Karlan Tucker

Karlan Tucker

Littleton, CO

Joined: August 18, 2006

My Company

Tucker Advisors

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I don’t know where you can consistently have a shot at 5 percent to 6 percent returns in today's economy, but I do know where you can get a guaranteed withdrawal rate of 5 percent to 6 percent that will not end until you end.

Today, many people are struggling to find an opportunity to earn 5 percent without excessive risk, or even with it. USA Today recently reported that the national average for a 5-year CD is 1.1 percent. My son inquired at a local bank about opening a savings account, and they quoted him an interest rate of .01 percent.

The stock market is currently hovering around 13,000, which is where it was in 2008. The price you pay for an asset determines your long-term return. The Dow at 13,000 isn’t cheap. Bill Gross of Pimco bond funds believes we can expect returns of just 4 percent to 5 percent for many years to come.

Yale University’s Robert Schiller says his model predicts that after inflation, stocks will return about 4 percent a year for the next decade.

The Dow’s recovery from a low of 6,500 to today's 13,000 is a result of the trillions spent by the feds. At some point, possibly as soon as June, when the most recent program entitled Operation Twist ends, the market will falter.

Equities are currently offering dividend yields at historically low levels of just 2.1 percent.* Dividends paying stock portfolios are making it difficult to live on the income.

Wall Street advisors used to follow the 4 percent rule, recommending that if you don’t withdraw more than 4 percent annually, you won’t run out of money. Due to recent years’ volatility in the stock market, this rule has been revised downward to 1.8 percent. That means on a $1 million portfolio, you would generate just $18,000 in income annually.

Investors and savers want better returns, but they don’t know where or how to get them. Recently, an individual told me he was going to “dollar-cost average” his way into the market because this reduced the risk for him.

Actually, economists have known for years that this is a very inefficient way to buy stocks and bonds. Going directly to your ideal asset allocation is more likely to generate a higher return. It turns out that dollar-cost averaging is more of a crutch than a shrewd investing strategy.

So, where are answers or hope for both savers and investors?
The best answer may reside in a fixed indexed annuity with an income rider. Today's rates inside of annuities are low due to interest rates being held artificially low because the government can’t afford to let the interest they pay on the national debt rise, or it would consume the majority of all tax revenue.

However, the withdrawal rate you can take when turning on income inside of these vehicles is largely unaffected. For most companies, the guaranteed withdrawal rate is 5 percent if you are in your 60s and 6 percent if you are in your 70s and have waited until that age to turn on the income.

Think about this: If you are receiving a 5 percent to 6 percent withdrawal rate that continues even when the principal is exhausted, isn’t that better than a 5 percent to 6 percent yield, which ends when you have lost the principal due to longevity or market volatility?

I don’t know where you can consistently have a shot at 5 percent to 6 percent returns in today's economy, but I do know where you can get a guaranteed withdrawal rate of 5 percent to 6 percent that will not end until you end.

*The Economist, Oct. 15, 2011
Pages: 12
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