Beyond the 4 percent rule

Consider John, a hypothetical 60-year old who has worked hard to save money for retirement that begins at age 65. 

After reviewing his estimated expenses and guaranteed sources of income (Social Security) in retirement, John and his financial professional determined that he would need an additional $10,000 annually to support his spending. Using the 4 percent rule, John would need $250,000 to generate that initial $10,000 ($250,000 x 4 percent = $10,000). John may want to have some protection for assets and income, making his future retirement income less vulnerable to market loss and/or longevity risk.

By utilizing a fixed indexed annuity (FIA) with an income benefit that may carry an additional charge as part of his retirement income plan, John may be able to generate the same $10,000 per year with far less in accumulated assets, while providing both protection from market loss and guaranteed lifetime income.

For John, this could mean starting at a withdrawal percentage from 5 percent to 7 percent. At the 7 percent rate, John would need only $142,857 to achieve the goal of $10,000 ($10,000/7 percent = $142,857). At 5 percent, he would need only $200,000 in initial assets ($10,000/5 percent = $200,000). Even better, John’s income can increase with income benefits that offer increasing income opportunities.

For people on the cusp of retirement, we financial professionals need to do better than fall back on the 4 percent rule when discussing retirement income with clients. It’s clear that the 4 percent strategy is only part of the discussion; more innovative solutions are necessary to deal with the significant risks that plague the retirement landscape. Increasing income options can help your clients manage the effects of market volatility and add a level of certainty for both their retirement assets and income.