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
Here are a few approaches that can help participants net better results:
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.
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
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.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.get xpress proposal