Client retirement withdrawals come with sequence of returns risk: When and how clients draw down their retirement savings can affect returns in the long term, said Michael Kitces, blogger and head of planning strategy at Buckingham Wealth Partners, who spoke Wednesday at the Schwab Impact 2020 online conference.
He provided three strategies for advisors to manage this risk for clients.
His presentation included examples of how clients can translate various buckets of money — like 401(k)s, IRAs, pensions, annuities and Social Security — into “sustainable cash flow” over a 30-year retirement period.
Obviously, one crucial factor is the type of market in which they retire, Kitces said, adding “the best time to retire is when the [price-to-earnings ratio] is low” — in other words, not today’s market.
Kitces discussed these three strategies:
1. Safe Spending Rate
This is the most conservative method and one that 50% of advisors watching the webinar stated they used in an instant survey. This is picking a withdrawal rate that is conservative and sticking with it, no matter how the market or inflation affect savings. One problem: This method could be too conservative and leave most of a retiree’s savings to heirs, Kitces said.
He showed a chart on spending rate with 30-year sequences as far back as 1871. The average “safe” rate was 6.5%, but Kitces notes that would have failed 50% of the time.
Most likely, if a savings rate is too low, the retiree will “lift spending,” Kitces said.
“I know there’s been a lot of discussion about whether the 4% rule is broken … but keep in mind the 4% rule was not based on average returns; it was based on worst sequences we’ve had in 150 years.”
But by selecting the lowest withdrawal rate — “that is, [preparing for] the worst we’ve seen in 150 years” — 96% of the time retirees in the 20th century “would have finished with more than what they started with.”