The 4% Myth

Using a 4% scenario, there is a 57% chance that retirees will run out of money

Talk with any financial advisor or retirement advisor and you’ll hear similar advice: plan participants saving for retirement should expect to spend on average 4% of their retirement savings post-employment.

If only it were true. A recent The American College and Morningstar study reveals how quickly retirement accounts would drain under that assumption. Using a 4% scenario, there is a 57% chance that retirees will run out of money.

Yet that isn’t the scary part – a separate study by The American College  shows that seven in ten people aged 60 to 75 have never heard of the 4% withdrawal advice. Of those, 16% think anywhere from 6 to 8% is a safe rate of withdrawal. For retirement advisors, just having the relationship with these participants isn’t enough – a mere 27% have any written plan in place, despite 63% of those surveyed saying they have a relationship with a financial advisor.

Retirement advisors need to be making the most of those relationships in order to help plan participants establish a strong retirement portfolio.

Here are a few approaches that can help participants net better results:

Life Expectancy

The American College finds that 51% of Americans underestimate the life expectancy of a 65-year-old man. By using life expectancy figures and tables, plan advisors can illustrate a more accurate picture of how long many plan participants can expect to live.

Better Percentages

With people living longer, retirement advisors should throw out the 4% rule and instead opt for a more conservative withdrawal rate – ideally based on plan participants’ lifestyle, retirement needs, and financial burdens.

No Assumed Safety Nets

Plan participants often make assumptions regarding what sources of income will feed their retirement needs. Social Security, while currently available, comes with no future guarantee. Nor does Medicare, inheritance, part-time work, or sources that cannot be predicted. Instead, participants should be encouraged to base their rate of retirement savings on that account being the sole source of money for retirement.

Fluctuating Market Conditions

Not too many plan participants pre-recession were focusing on how future market conditions could impact their portfolios. And while immediately following the financial meltdown investors were hyper-alert to changing markets, the furor has dissipated. In order to help participants avoid large losses in any future market downturn, retirement advisors can educate them on the impact many retirees faced in 2008-2009. Illustrating market volatility and showing the various asset allocation options can help participants make sound decisions that protect their investments.

Percentage methodology may work to give plan participants a sample view of spending during retirement, but with so many pressures on investments and participants’ finances, advisors can better serve their participants through a more sensible approach to saving. Simple decisions based on the right criteria can help plan participants maintain retirement balances well into retirement.

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