Income Riders – The Answer to 2.8% being the new 4% for Retirees
How much money can I afford to take from my portfolio, in order to last me through retirement? This is a question retirees, baby boomers, and the senior market are faced with day in and out. There was a great article on “Market Watch – The Wall Street Journal” today, written by Anne Tregesen that breaks down why 2.8% is the new 4%.
“Conventional wisdom has long favored the so-called 4% rule, which holds that an initial withdrawal rate of 4% of the value of your portfolio at retirement–adjusted annually for inflation–should be sustainable over 30 years. But new research published by research giant Morningstar casts doubt on that advice–and the conclusions the report draws do not make for happy reading for retirees. The upshot, according to Morningstar, is that in today’s markets, retirees who want “a 90% probability of achieving a retirement income goal with a 30-year time horizon and a 40% equity portfolio” should withdraw just 2.8%. That conclusion puts pressure on retirees to either plan to live on less, or plan to save much more before retiring, or both.”
“The problem, the report says, is that yields on government bonds are “well below historical averages.” But while that situation is likely to persist for some time, it is not reflected in the Monte Carlo forecasting models that most financial advisers currently use to project how much retirees can afford to spend. (Those models assume investors will earn a random sequence of annual returns that, over time, will net out to the historic average for bonds.)”
“More specifically, the paper says, “While the average annual arithmetic return on the Ibbotson Intermediate-Term Government Bond Index from 1930 to 2011 was 5.5%, the interest rate … today is close to 2%, which is 3.5% lower than the historic average. An analysis that assumes an average bond return of 5.5% in the first year will significantly overestimate early retirement portfolio returns.”
So what options do the senior market, and baby boomers have? One great option is index annuities with lifetime income riders. A lifetime income rider is something that can usually be added for a fee to an index annuity. The average payout percentage for a 60 year old with an income rider is 4.5%!
There are tons of different index annuities and lifetime income riders out there. It seems every insurance carrier has some sort of lifetime income rider they are claiming to be the best. Here at Annuity Think Tank, we specialize in educating advisors and clients on the multiple income benefits these riders provide, and help determine which one is a fit. Visit us at www.annuitythinktank.com for more information.