My Comments: For many years than I am aware of, there have been “experts” who have expressed their opinion about the optimum rate to withdraw money from accumulated retirement funds. The reason for this is to offset a fear by many of running out of money at some point before you die. Typically, that’s not a good thing.

One expression of this by me has been that retirement is a transition from working for money to having money work for you. The objectiive is to have as big a pile as possible from which to draw funds to pay for the things you need and the things you want.

The dilemma comes full circle when I ask you “when do you plan to die?” I’ve not yet met anyone who is willing to hazard a guess. So you will likely fall somewhere between running out of money before you die or dieing with enough money in your accounts that, on reflection, you could have spent the last few years in the south of France with side trips to Paris.
Simply put, there is NO best answer, but this article comes close.

By Perry Chesney, CIMA®, CFP®

Over the past several years one of the hottest questions debated among practitioners and clients alike has been: What is a “safe” withdrawal rate in retirement?

Beginning with William Bengen’s 4% prescribed rate, this magic number has been fluctuating – from the managers who argue for a higher rate based on portfolio rules to a recent study concluding that the only sustainable rate is a mere 2.8%. All of these methodologies make capital market assumptions then run through various calculations to demonstrate why if one takes his retirement account value at retirement age, multiplies it by the withdrawal rate to determine a dollar amount of annual spending and inflation adjusts it, the money should last as long as his pulse. While we could debate the rationale behind each of these various theories individually, there is a common factor being overlooked by them all: the lifestyle price of safety.

The premises of Wealthcare are to ensure that clients experience the dreams of their one and only life while avoiding needless investment risk AND lifestyle sacrifice. When considering the issue of identifying a safe withdrawal rate that fulfills our promise of comfort & confidence, we’ve found that the only safe withdrawal rate is a flexible one.

Wealthcare identifies an Ideal & Acceptable range for each aspect of a client’s financial life – saving, spending, retirement age, investment risk and estate goals. Ideal represents their greatest aspirations; acceptable, a lesser but still satisfactory compromise based on the extreme markets that we may face.

This range helps us identify what our clients value while preparing us to deal with both life and market uncertainty. By understanding the priorities amongst competing goals and discussing in advance the tradeoffs they would be willing to make between goals, we’re able to continuously craft life-relevant advice with confidence in funding the future.

When markets misbehave, our choices are not limited to spending rate vs. investment approach. The adjustment of lower priority goals toward their acceptable levels may be enough to keep the plan on track and high priorities intact. Conversely, if markets are favorable, we’re able to make adjustments to buy ideal levels of higher priority goals.

We are alerted when adjustments are needed by measuring the uncertainty of the markets and stress testing each client’s goals set to determine their funded status. We re-evaluate this funded status and revisit the ideal & acceptable ranges and priorities at least quarterly to make sure our advice is current. This complete process allows us to deal with the risks of the things we cannot control while still making the most of each client’s only life.

While controlling risk in order to have confidence of funding future spending goals is a serious issue, many other proposed solutions of the safe withdrawal rate dilemma seem to overlook the certain lifestyle cost that the retiree would have to endure. We believe that at the end of the day, a person’s current life is just as important as their future life.

In our next Educational Webinar, The Lifestyle Price of Hedging Retirement Withdrawal Risks, our CEO, Dave Loeper, will discuss the lifestyle impact of various planning strategies including:
• The Buckets of Money method
• The use of Insurance Products – Immediate and Variable Annuities
• The Safety First approach

All of these methods seek to buy investors’ confidence in a “safe” withdrawal rate by hedging against the constant uncertainties of return sequences and inflation. During this webinar Dave will share his evaluation of the true costs of such hedges. If you’re interested in joining a discussion of investment management and retirement planning strategies from the perspective of your clients’ lives, email us and reserve your spot.