In our industry, retirement comes down to 2 things. One, How much money am I going to get every month. Two, what happens to the left overs when I die? I dare not say those are the only 2 issues boomers face, but I hear them more than anything else. That got me thinking about the 4% rule. For those that are unaware, the 4% rule is more a rule of thumb. 4% being the percentage of your retirement savings that you should draw down in order for your retirement to last. It’s really simple math. 4% per year equals 25 years of money. I tell you, it is definitely the way companies think, but that number is tough in today’s economy.
I haven’t seen anyone be happy with the 4% number in a long time. Annuities have come so far with the riders and calculations used to deliver income for life, that the number just doesn’t cut the bill anymore. If you have a nest egg of $200,000 saved and are ready for income, the 4% rule says you should use $8,000 a year. Can you live off 8 thousand dollars a year? Sure, if you are frugal, have ZERO debt, ride a bike everywhere, eat home grown vegetables, never travel or have any hobbies. The majority of retirees are not in that position in life. Not at 65 when they are most likely, just beginning retirement.
So what’s the right number? The short and easy answer is this….it’s different for everyone. We’ve all seen the commercials of the 2 middle aged Americans walking around with numbers in their hands. They go on to tell each other it’s their retirement dollar value they have to have. Man number 1 had something like $650,000 and lady number 2 has $1 million. Same principle when it comes to the percentage you get from that money. I can tell you I don’t think it’s 4%. it could be 5% or 6%, but the percentage changes along the way as you age. The longer you save and grow, the higher your percentage is going to be.
Buying an annuity is something simple that is made out to be complex. So I will break down the easiest thing for you. Income riders and payout percentages. I will start by saying not all companies pay out the same percentage at the same ages. Some change every 5th year, others change every year. But it IS, the most important thing to look for during your comparisons. Companies are great, you want a good company, but don’t get sold on that alone. A lot of times the big companies fall short when it comes to income. So income riders. You put in your premium and it grows at a set, guaranteed percentage. Call it 6%. Every year you defer, you grow 6%. Somewhere around your 11th year, your money will double. $200,000 becomes $400,000. As long as the money grows compounded at that percent, all companies will show the same dollar amount. Simple math. The difference comes in how they pay you out. Company A might pay you 4.75% between the ages of 65-69. Company B pays out 5% from the same age bands. Which one are you going to take? That quarter percent, makes around a $2,000 difference per year. Make sure when you buy an annuity, you get a comparison of the not the companies, but the riders as well.