Withdrawal Rate Risk
Making Money Last
There are many different opinions on deciding how much money you can safely take out of your retirement savings each year. However, there is a general rule of thumb called the “four percent safe withdrawal rate” that most experts start with. This rule states you can withdraw four percent of your retirement savings annually, adjusted for inflation, without running out of money.
In 1994, a study on this topic found that the four percent rule worked well for retirees with a mix of stocks and bonds in their savings. But nowadays, some researchers are questioning if this rule still applies. Because of low bond yields, a safer withdrawal rate might be lower, like 2.8 percent, 2 percent, or even as low as 1.49 percent for bonds. This study didn’t consider the current period of low bond yields, which can affect how bonds perform in your savings.
You might think that reducing bonds and increasing stocks could solve this issue but investing more in stocks can expose you to more market ups and downs, which adds more risk to your retirement savings.
Fixed Index Annuity
For example, let’s consider Tom and Laura who both have one million dollars saved for retirement and need forty thousand dollars annually. Tom plans to withdraw four percent of his savings each year, giving him forty thousand dollars. However, recent research shows that there’s only a fifty percent chance his money will last 30 years using this approach. To have a 90 percent chance of making it last, he would need to reduce his retirement income to $27,000 per year.
On the other hand, Laura decided to include a fixed index annuity in her retirement plan. She uses a portion of her one million dollars to purchase this annuity. With this approach, she can still achieve her retirement income goal of $40,000 per year, and the annuity provides a guaranteed income for life. It’s important to consider different retirement products, such as annuities, specifically designed to generate income during retirement.
If you are considering a fixed index annuity or have questions about different retirement products, consult with a financial advisor to help you make an informed decision to reduce your withdrawal rate risk.
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