What is a safe withdrawal rate?

By Randy Timm


The question arises, what safe withdrawal rate will also provide retirees with the income they consider necessary to live comfortably in retirement? Maybe you should consider offering your clients a fixed indexed annuity that can guarantee up to a lifetime 10 percent withdrawal rate.

Over the years, many articles have been published and much discussion has taken place regarding what a safe withdrawal rate percentage is for retirees. One of the reasons this percentage is so important is because 66 percent of Americans say they are worried about not having enough money for retirement making a lack of retirement funds America’s biggest financial worry.1

The 4 percent rule is a general rule of thumb that has been used in the industry for many years. Based on this rule, retirees should be able to withdraw approximately 4 percent each year, adjusted for inflation, from their portfolio. It assumes that under normal conditions and with a diversified portfolio, their retirement balance should last for their lifetime. Thus, making it the safe withdrawal rate that retirees are looking for.

However, a recent article in the Journal of Financial Planning titled, “A Safer Safe Withdrawal Rate Using Various Return Distributions”2 suggested a different answer to the safe withdrawal rate percentage discussion. Their analysis concluded that using a 4 percent withdrawal rate would result in portfolio failure as high as 18 percent of the time.

It suggests instead that a truly safe withdrawal rate would be 2.52 percent. This is largely taking into consideration that life expectancy is increasing, those retirees covered by defined benefit plans is decreasing, and the recent turmoil in the financial industry has adversely affected retirement savings.

Their research finds that the 2.52 percent withdrawal rate could be sustained with low to no chance of portfolio failure versus the previously used 4 percent, thus naming it the new safe withdrawal rate to consider.

Then the question arises, what safe withdrawal rate will also provide retirees with the income they consider necessary to live comfortably in retirement? Maybe you should consider offering your clients a fixed indexed annuity that can guarantee up to a lifetime 10 percent withdrawal rate.

Here’s an example:
  • At age 50, your client has money they have been accumulating in their annuity for retirement.

  • Their intention is wait 20 years or until age 70 to take income from that annuity.

  • After 20 years, the value of their annuity has grown to $500,000.

  • Now at age 70, they decide to start receiving an income payment and could be eligible to receive a 10 percent withdrawal from their account, or $50,000 annually.
At age 50 when your client decided to use this fixed indexed annuity, they were giving themselves the option to take advantage of a double-digit safe withdrawal rate in the future that also guarantees payments would continue for their lifetime.

Using the example above, not only can this annuity offer your clients up to a 10 percent withdrawal rate, it also offers these additional benefits:
  • Tax-deferred accumulation.

  • Total control of principal during accumulation and payout phases.
  • Guaranteed lifetime payments continue for life even after the principal is depleted.

  • Husband or wife can step into the annuity upon death of spouse.

  • Choice between predictable payments and payments with the opportunity to increase.

  • Joint spousal payout available – up to 9.5 percent in this example.

  • Accepts qualified or non-qualified dollars.
Still, the questions remain: What is the safe withdrawal rate? What safe withdrawal rate do you want to offer your clients?

1 Gallup's April 7-11 (2011) Economy and Personal Finance Poll
2 Manoj Athavale, Ph.D. and Joseph M. Goebel, Ph.D. 2011. “A Safer Safe Withdrawal Rate Using Various Return Distributions.” Journal of Financial Planning. http://www.fpanet.org/journal/CurrentIssue/TableofContents/ASaferSafeWithdrawalRateUsingVariousDistributions

BIL-7
For financial professional use only – not for use with the public.