What's the key to long-term retirement success? Not outliving your money. And to do so, the Institutional Retirement Income Council suggests advisors carefully work with their clients to figure out withdrawal rates that are both realistic and safe, over the long term. That may require some serious retooling of their plans.
In "The Problem With Spending Too Fast," a new brief released Tuesday, the IRIC notes that retirees need to change their focus and consider their retirement plan account balances more as a source of monthly income, not just their personal wealth.
It also focuses on three key strategies retirees can use to better address the decumulation phase and make safer decisions regarding their 401(k) or 403(b) retirement plans:
Withdrawing funds at a 4 percent rate in the first year of retirement, followed by inflation-adjusted withdrawal rates in later years.
Using all or a part of the lump sum retirement savings to purchase an annuity for the retiree's life, the joint lives of the retiree and spouse, or one with a feature that guarantees payments for life with a specific minimum period.
Purchasing a guaranteed minimum withdrawal benefit which permits a retiree to maintain some control of the retirement funds, but at the same time provides a guaranteed benefit.
"Many retirees believe they can with draw 10 percent or more of their retirement savings each year and still have enough money to last thier lifetime," said Fried Reish, a partner at Drinker Biddle & Reath LLP and co-author of the brief.
"However, given the statistical chance that at least one spouse in a married couple aged 65 will live another 30 years, 'safe' withdrawal rates are much less than most retirement plan participants think."
More realistically, Reish said that a rate of even 6 percent might be too much.