Creating an adequate amount of income for individuals to live comfortably in retirement will require a combination of several income producing strategies, as well as knowing what constitutes realistic and “safe” withdrawal rates from retirement plans, according to a new issue brief by the Institutional Retirement Income Council.
IRIC a non-profit think tank for the institutional retirement industry based in Iselin, N.J., discloses in the brief that it also believes that for individuals to outlive their retirement funds, they need to treat their retirement plan account balances as a source of monthly income rather than as personal wealth.
“Many retirees believe they can withdraw 10% or more of their retirement savings each year and still have enough money to last their lifetime,” says Fred Reish, an IRIC member and a partner at Drinker Biddle & Reath LLP, who co-authored the issue brief. “However, given the statistical chance that at least one spouse in a married couple age 65 will live another 30 years, ‘safe’ withdrawal rates are much less than most retirement plan participants think.
“In fact, anything greater than 6% results in a significant risk of exhausting retirement funds while the individual is still alive,” adds Reish. “This will be shocking to many participants.”
The issue brief, “The Problem with Spending Too Fast: Retirement Savings Withdrawal Rates,” focuses on different strategies that will produce a ‘safe’ withdrawal rate for individuals who participate in their employer’s 401(k) or 403(b) retirement plans. By safe, the issue brief means a withdrawal rate from retirement plan funds that have a high degree of probability of lasting, or payments from an insured product that are guaranteed to last for the participant’s lifetime. The issue brief provides an in-depth analysis of three strategies including: