A new report claims that the so-called 4% rule of retirement spending needs adjustment—the media all seems atwitter (literally). This week we asked NAPA Nation to weigh in.
The 59-page report by some research folks at Morningstar opined that those wanting a high level of assurance that their retirement nest egg will last should spend no more than 3.3% of their savings in the first year of a three-decade retirement, and adjust for inflation after that. And as you might expect—considering not only that the report calls into question a long-standing “rule” of retirement planning—and particularly that it does so in the context of reducing expectations for retirement spending—it garnered a lot of headlines, including the Wall Street Journal (and even this publication).
Now, in fairness, there’s a bunch of caveats and outlining of assumptions in the report—but the headlines all seem to be about adjusting retirement spending expectations lower—from that 4% rule of thumb.[i] But is it really a rule of thumb for you/your practice? In other words, does it (really) matter?
Practice ‘Says’
Not surprisingly the vast majority (94%) of respondents had heard of the 4% “rule.” That said, we asked if readers used that 4% rule in their communications/financial planning education with participants—and the results were… varied:
28% - Occasionally.
27% - Frequently.
12% - All the time.
12% - Almost never.
11% - Sporadically.
10% - Never.
We got some perspective on those variations in the comments below:
When speaking to a participant one-on-one, we mention the rule when they ask how much they need to accumulate and an estimate of the income their current balance could provide.
It really depends on the investment allocation and age of the retiree when benefits start. It also depends on whether they have other income; perhaps a Pension and/or Social Security.
it is a starter for income and return conversation.
It’s not detailed enough.
Every individual’s situation is different. If I mention the 4% rule, it’s to put in context that you can’t plan on spending 10% or 20% of your balance in retirement without running out of money. People always think that they can spend much more than is reasonable. Mentioning a smaller number can be a shock and it gets people to pay attention. It’s much more reasonable to talk about having an initial spending goal and reviewing it annually.
I am not sure it is reliable in today’s markets.
I don’t think it’s a very important point if a professional is building a portfolio for a client. It’s perhaps useful for group retirement education but even then it’s more of a common reference point to look at overall savings rather than actual, this should be your withdrawal rate.
It was not meant to be hard and fast, you always have to look at each client individually. For a very general rule of thumb, still okay to use.
It does not match real life spending. Go Go, Slow Go and No Go translates to not having a straight-line spending in retirement! I was on the LIMRA Retirement Income Roundtable many years back... we all as an industry admitted we had no tools to help spend... nothing has changed.
For those with LOTS of money, I do.
People have differing wants and needs. This is a generic point.
Retirees need to wake up to the facts of how quickly their retirement $$’s can disappear.
Every situation is different and one must take action accordingly. There are various planning tools available that allow us as advisors to customize individual plans for clients. The 4 percent rule existed and was used before many of these planning tools became available.
I’ve said 6%.
Because it is a rule of thumb and we don’t use them!!!!
It is difficult for me to imagine the forward-looking fixed income performance assumptions.
It’s a good rule of thumb that is easy to understand and illustrate. Every client is different, so we start here and then tailor to each individual’s situation.
We use capital asset pricing models and monte carlo simulation to help us pin point an achievable spending level. Then we course correct every year as life happens.
Guideline for better conversation.
We use our own version of it. 2 to 3% depending on the aggressiveness of the assumptions a client wishes to make.
As a reference not a rule.
I do caveat it that it is not foolproof, but it helps to paint a picture for the average k-plan participant.
We blend guaranteed income—Social Security and Annuities—to map out income. This can allow us to reduce the chances of running out of money in retirement.
But we explain the risks and variability of every model.
Because I believe that retirement income should not be a tied to a fixed rate, but should be continuously adjusted based on expenses; a budget is just as useful, to retirees as it is to active employees if not more so!
I believe a longevity analysis combined with a full understanding of the client’s risk profile are more important in determining a withdrawal strategy. Most clients do not take regular income disbursements but rather, withdraw for specific needs or wants. The less prepared a client is for retirement, the more likely I am to recommend a lifetime annuity to protect their income stream.
Inflation Airing?
A related issue of growing (literally) concern is inflation. We asked readers if the recent surge in inflation had found its way into communications/discussions about retirement planning.
37% - It has always been.
27% - Depends on the situation.
20% - Yes—these days we’re leading with it.
9% - It’s mentioned, but not really emphasized.
4% - No.
3% - Not yet—it’s transitory, after all.
We’ve been talking about inflation for probably 5 years. For our 9/30/2021 meetings, we are focusing on the topic for both sponsors and participants.
Projections always have assumptions about inflation and investment returns. So, there are always caveats about how actual year-to-year results will impact future spending patterns. We emphasize that planning is an ongoing process not a “one and done".
Part of investment and financial planning discussions since it is in the media and being felt by each person in various ways.
But at a heightened level.
Inflation was always discussed and usually ran at different rates. Now it is certainly more of a topic.
It comes up as economic impact when doing investment reviews. It has always been integrated into our participant education as a risk. Now employees actually understand what it means...
Pre-retirees need to spend significant time honing their “future” budget starting 10 years before retirement. This way they are acutely aware that financial surprises happen in life (including inflation), and must be accounted for in projecting how ready they are to retire.
Most of the current inflation isn’t impacting our clients too much—we believe inflation will subside 2H2022 as the supply chain loosens up. Most are impacted by food/gas/oil costs buy the high drivers of inflation (cars/homes) aren’t impacting clients.
Yeah, has been a topic of discussion for several quarters now, not only due to the impact on decumulation but due to impact on the economy/markets that can affect accumulation as well.
Does it Matter?
But then, ultimately, we asked readers if the so-called 4% rule mattered in their practice—once again, the results were… again… mixed:
35% - Sometimes.
31% - Absolutely!
23% - Almost never.
11% - No.
It is a starting point for discussion purposes with clients. Depending on their specific circumstances, it may or may not have applicability, but we need to speak to our clients in terms that are easy to understand.
Every situation is different and therefore the spending level is different.
Again, every situation is different. Quite honestly if you use the 4 percent rule, I believe you discredit yourself as a financial planner.
Our focus is on qualified plans with very little AUM in personal wealth. We use it to help participants estimated the conversion of their savings to an income.
As long as one understands it is not stuck on 4% but rather one’s spending rate needs to be less than one’s expected cash flow rate (or percentage of income producing net worth) to be long term financially successful.
Like all such rules, it can help clients get their heads around longevity of their money. Not much else.
Only as a general guideline or a starting point, but each situation is different.
I think it gives client’s a realistic starting point.
Thanks to everyone who participated in this week’s NAPA Net Reader Radar Poll!
[i] Certified financial planner William P. Bengen is frequently credited with developing the concept, based on his article, “Determining Withdrawal Rates Using Historical Data,” published in the October 1994 issue of the Journal of Financial Planning.)
"some" - Google News
November 19, 2021 at 08:35PM
https://ift.tt/3kVmG4W
READER RADAR: The 4% 'Rule' (Still) Matters… Some - National Association of Plan Advisors
"some" - Google News
https://ift.tt/37fuoxP
Shoes Man Tutorial
Pos News Update
Meme Update
Korean Entertainment News
Japan News Update
Bagikan Berita Ini
0 Response to "READER RADAR: The 4% 'Rule' (Still) Matters… Some - National Association of Plan Advisors"
Post a Comment