Systematic withdrawals not really a ‘strategy’
When the time comes for retirees to draw income from their savings, many unwittingly choose strategies that could increase their risk and reduce the number of years their money will last.
A LIMRA Secure Retirement Institute study of consumers between ages 45 and 75 with investable assets of $100,000 or more found that 56 percent do not have a strategy for income in retirement. Among those who do, their strategy consists largely of making withdrawals from their savings.
In the study 6 in 10 who have a strategy said they plan to withdraw from their savings only occasionally or when needed. The issue of risk is more pronounced for the 32 percent who said they will make regular withdrawals from their savings. Of this group, most plan to withdraw a constant dollar amount or percentage of their savings on a regular basis.
Earlier research from LIMRA Secure Retirement Institute suggests that using only a withdrawal strategy invites risks that could deplete savings, such as withdrawing too high a percentage each year.
Even if a retiree chose the often recommended 4 percent withdrawal rate, future investment returns that are lower than previous ones could also jeopardize savings. History has shown us that a truly safe maximum withdrawal rate is an elusive figure.
Along with market volatility, longevity is another important factor that can affect income planning. Secure Retirement Institute research has shown there is a 50 percent chance that at least one member of a 65-year old couple (of average health) will live beyond age 88 and a 25 percent chance that one of them will celebrate their 97th birthday.
The couple in this example would need an income source that lasts 30 years or longer. If they pursue only a withdrawal strategy, they risk not having enough financial resources for the last years of their lives.
Only 20 percent of those in the study said they plan to convert some or all of their household savings into guaranteed income.
Companies and advisors can educate pre-retirees and retirees about guaranteed income sources to protect at least some of their assets from market uncertainties. When retirement can last three decades or more, securing income for the long term becomes an essential part of a financial strategy.
Guaranteed Lifetime Income
Risky Business: Among those with a plan for income in retirement, only 1 in 5 are considering guaranteed lifetime income. (Percentage withplan to generate income from savings*)
- Withdrawal rate on an occasional basis, or when needed – 60%
- Withdrawal rate on a regular basis – 32%
- Convert some por all assets into guaranteed lifetime income – 20%