When many people think about the market, they think in terms of accumulation rates. In other words, they think “the market has averaged 10% over the last 30 years”. Of course, this leads them to believe that they can withdraw 8% or some other number and have a secure and lovely retirement.
Sadly, this belief is far, far from the truth. Academic research on retirement rates has shown that the actual sustainable withdrawal rates from welldesigned portfolios are significantly lower than most believe possible.
Why is this? Well, there are a number of reasons but let’s start at the beginning. The first thing we have to think about is “how long will we need cash flow?” Actuaries tell us that if two relatively healthy 65 year olds retire,
there is nearly a one in three chance that one of them will still be alive at 95(1). That is 30 years of retirement! So we have to base our calculations on that potentially lengthy period of time.
In a study by one of the leading researchers on retirement in the US 50,000 Monte Carlo simulations were done to build withdrawal rate probability curves. They concluded that if one wanted a 90% or higher probability of not running out of money over a 30 year retirement, the distribution rate required was between 3-4%.
For many, that is a shockingly low number. A different way to look at it is that we would need $1,000,000 for every $30,000 - $40,000 we are trying to replace in a normal retirement.
This is a big problem for a lot of people. However, this data is based on a very traditional approach to growing and distributing money from typical retirement plans and portfolios.
What if there were another way? Well, the good news is that there is another way that allows for distribution rates in the 7-13% range. And, not only does it allow for higher distribution rates but for many people it also involves them
taking less investment risk. Plus, it has favorable tax features, it increases asset protection and it opens up options in how to take retirement income that wouldn’t exist otherwise.
(1)“Living too long is a risk!” Steve Vernon, MONEYWATCH, July 24, 2013.