Financial advisors wedded to a 4 percent annual withdrawal rate for their clients’ retirement portfolios are likely doing their clients a grave disservice, according to annuity expert Moshe Milevsky in his keynote address to the Retirement Income Industry Association’s spring conference in Chicago on March 23.
The York University finance professor regaled the audience of advisors and retirement income executives at the recent gathering with common discrepancies between retail financial professionals and financial economists such as himself who seek to optimize investment outcomes.
According to Milevsky, who is based in Toronto, the well-known Bengen rule that says investors can draw down 4 percent of their portfolios without fear of outliving their money fails to take into account that investors of the same age and equal portfolios nevertheless differ widely in two key attributes: tolerance for longevity risk and pension income resources.
Whereas Bengen-influenced financial planners might look at two 65-year-olds with $1 million portfolios and argue they could draw down $40,000 annually, replenishing funds through the growth of their portfolios, Milevsky was emphatic that there is no universally optimal spending rate.
One’s attitude toward drawdowns will be heavily influence by whether there is pre-existing pension or annuity income and how much that is; someone with $24,000 in Social Security income will be more confident than someone with no pension at all, but not as confident as someone with $60,000 in pension income.
Also, a retiree that expects to live to 95 and is in dread of outliving his portfolio will be far more cautious about his withdrawal rate than a risk tolerant investor.