Your Thriving Practice

Is the 4% rule still a good income strategy?

With retirees facing more unpredictability than ever – is 4% enough? Maybe they need a new plan.

The problem with planning for retirement is, no one can accurately predict the future. You can’t predict how long you might live. You can’t predict what the markets might do. You can’t predict what your health needs might be. And you can’t predict what other financial expenses might arise in retirement that could deplete your savings faster than your nest egg can support.

Then there’s the opposite risk. What if you plan for the worst and live a frugal retirement, only to reach the end with a huge stash – regretting that you hadn’t spent a bit more freely during your retirement?

“The 4% rule isn’t meant to ensure your clients will have enough income to live on each year in retirement.”

Can the 4% rule help clients confidently plan for retirement?

The essence of the so-called 4% rule is this: if your client withdraws 4% of their initial portfolio account balance for their first year of retirement and then adjusts that amount each subsequent year for inflation, their nest egg may last as long as they do.

But the 4% rule isn't meant to ensure your clients will have enough income to live on each year in retirement. The rule is only intended to help ensure they don’t run out of money based on a 30-year retirement.

There are no guarantees in life

The 4% rule doesn’t guarantee anything. It is only based on historic market performances, average life expectancy rates, and average costs of living. If your client lives longer than average, they may run out of money. If they have medical needs that require them to withdraw more than 4% each year, they may run out of money. If the market underperforms for a number of years, they may run out of money.

The risks of relying on the 4% rule to provide enough income all the way through retirement are very real, and are compounded should clients experience a multitude of those risks.

So how can you create a retirement plan that offers more guarantees to help protect your clients against the unknowns the future may hold for them?

The argument for fixed index annuities

Fixed index annuities could be a supplement to a retirement income strategy that can offset some of those risks and offer an opportunity for guaranteed lifetime income your clients can’t outlive. Adding a fixed index annuity to your clients’ retirement mix may offer:

  • Potentially more than a 4% annual withdrawal opportunity
  • A variety of traditional and enhanced payout options for retirement income
  • The opportunity for growth based on positive movement of an index
  • Accumulation of earnings on a tax-deferred basis
  • Protection against market losses

 

So while no one has the crystal ball to see what challenges clients may face in retirement, we can probably all agree that the 4% rule should be used more as a “guideline” for retirement planning. We believe a more well-rounded approach should include additional sources of guaranteed income to supplement Social Security and tackle any unforeseen roadblocks to a long and enjoyable retirement.

Income planning tools

Download and share the following resources with your clients to help them better understand their income planning options.

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