As an individual enters retirement they are faced with the decision of how much of their savings and account values should they spend per year in retirement. If they spend too much, they are faced with the dire consequences of outliving their money and being forced into making drastic life changes. If they spend too little, they may not have enjoyed their golden years to their full potential. Faced with this dilemma most individuals turn to professional advice and ask the question, how much can I safely withdraw from my savings and accounts without running out of money? Unfortunately that question brings many varying opinions.
For years advisors and planners have touted the 4% rate as a rule of thumb. This rule of thumb was born out of the research done by William Bengen in the early 1990′s. Bengen’s research ultimately declared that retirees could withdraw 4.5% per year and their money would last for 30 years with a high degree of probability. In 2010 a report in the Journal of Financial Planning advocated only a paltry 1.8% withdrawal rate as safe. Only a few weeks later a report in the Retirement Management Journal suggested for some individuals 7% maybe safe. With such a widely varying mix of advice what is one to do with one of the most important financial decisions in their life, and why is there such disagreement on the amount to be taken that is safe?
The simple answer as to why financial professionals do not agree on what a safe withdrawal rate is, is because there is not a safe withdrawal rate unless you have a guarantee behind it. Even if a withdrawal rate has a 90% probability of working out, it is little consolation if you are the unlucky one out of every ten people that ends up flat broke. Even more troubling is that most assumptions on what is a safe withdrawal rate are based upon the past. Today retirees are faced with low interest rates everywhere they turn. Banks pay little to nothing on savings accounts, checking accounts, and CD’s. Bond yields are at historically low levels. These low interest rate levels will make proposed safe withdrawals rates of the past even more difficult to achieve.
There is one tried and true method of determining how much money you can spend on an annual basis. Using a SPIA (single premium immediate annuity) and placing money with an insurance company, an individual can receive a guarantee to receive a payment every month for the rest of their life. A husband and wife by using a SPIA can choose to guarantee a payment every month as long as one of them is living. A 65 year old may receive a payment as high as 7.3%* per year for life!
Don’t put your retirement paycheck at risk, talk to an expert at AnnuityReserve.com about how to create a truly safe withdrawal rate that you can not outlive.
*Sample rate is based upon data provided by New York Life Insurance Company. Actual rates may vary at time of issuance
*Guarantees and Safety are subject to the claims paying ability and financial soundness of the insurance company contracted with.