Traditionally, the recommended savings withdrawal rate for retirees has been four percent. However, a recent study found that individuals who take this approach have a fifty percent chance of outliving their savings.
The New Standard for the Withdrawal Rate
This research has spurred a lot of interest among financial advisors as to what a safe withdrawal rate actually is in 2015 and beyond. According to the same body of research, the figure is much closer to two percent than four.
Given that information, what can trained financial advisors do to help their clients? The answer to that question starts with understanding client’s’ behavior.
Here’s What Retirees Are Thinking About
As with any stage in life, there are pros and cons that go along with retirement. Two concerns commonly associated with retirement are outliving savings and dying. For someone who’s not retired, it’s easy to assume that either both concerns would have the same weight or that the latter would be what retirees think about the most.
Surprisingly, research has found that’s not the case. While only 30% of retired individuals worry about dying, a full 70% of this population regularly worries about outliving their savings. Given that large figure, it’s clear that this is an where retirees are actively looking for help from certified financial planners.
Taking a Dynamic Approach to Withdrawals
Retired people from all walks of life are looking to financial planning professionals for solutions to ensure that savings aren’t outlived. But due to the optimal withdrawal rate being half of what has traditionally been thought of as safe, advisors are just as interested in new solutions.
One option that is brought up on a regular basis and has been employed by some advisors is an approach that’s known as consumption-smoothing. The simple explanation of this strategy is it’s based around retired individuals adjusting their spending habits in response to the appreciation or depreciation swings of their assets.
Although it’s easy to understand the thought process behind this kind of strategy, it’s not something that has performed well in the real world. One issue is that a large percentage of the population simply doesn’t have the level of savings that’s needed for the approach to be effective. Another issue is this strategy involves too much ongoing work for retirees.
Due to the discovery of the flawed nature of the traditional safe withdrawal rate and the problems presented by strategies involving consumption-smoothing, a more appealing option for advisors and their clients to consider is one that involves dynamic withdrawals.
By exploring dynamic withdrawal strategies that make it possible for retired individuals to take advantage of tactics like self-insuring, advisors can help their clients figure out what approach is going to best protect against outliving savings.