The main goal of retirement income planning is to help our money last as long as we do. This seems like a relatively straightforward objective, so why do so many people start with a retirement income strategy that leaves so much to chance?
The “4 percent rule,” which states that retirees can achieve a high probability that their savings will last 30 years by pulling about 4 percent annually from their nest egg and then increasing the withdrawn amount by 3 percent each year to offset the effects of inflation, has been a popular strategy since it was introduced in the early 1990s.
There’s no question that the 4 percent rule can be effective in helping to establish retirement budgets and spending patterns. But as we know, planning for retirement income doesn’t stop there. Analysis by Manoj Athavale in the Journal of Financial Planning (July 2011) has shown the 4 percent rule has an 18 percent probability of failure due to market volatility and longer life expectancies. In other words, 18 out of 100 people would run out of money in retirement utilizing the 4 percent rule. The shortcoming of this approach is evident in its lack of guarantees–an important factor when you consider the current historic level of market volatility. Further, it’s becoming increasingly apparent that the 4 percent rule, on its own, may not work for everyone.
Thankfully, solutions exist that can potentially increase income and can generate the same level of retirement income as using the 4 percent rule, but offer the added benefits of protection and guarantees.
Consider John, a hypothetical 60-year old who has worked hard to save money for retirement that begins at age 65.