Is the 4% Rule Broken?

Have you heard of the 4% Rule? That’s the amount of money that could be safely withdrawn from an investment account without depleting it over the lifetime of the individual.

William H. Byrnes, Esq., and Robert Bloink, Esq., LL.M. recently wrote an article, “Are Annuities the Solution to Old 4% Retirement Rule,” in AdvisorOne, saying that for years, the 4% rule provided the baseline from which advisors determined strategies for retirement account withdrawals. The rule is simple, well-trusted, and until recently, relatively unlikely to fail. But, the authors point out, in today’s low-interest rate environment, the strategies that worked for the past 20 years are simply not working, meaning that advisors and clients must create alternative solutions for providing sustainable retirement income.

People who have traditionally sought aggressive investment returns and have not looked favorably on annuities cannot ignore the evidence. New studies suggest that annuities are a competitive alternative to the old 4% rule.

The authors go on to say that: the 4% rule suggests that if you withdraw 4% of the balance from a retirement account each year, you will be able to create a sustainable retirement income stream with virtually no risk of exhausting the account assets. This strategy has worked for years, more or less, but there have always been problems, such as the failure to account for actual investment performance in any given year. It has generally been a safe bet, however, that you will not run out of money, which is the greatest fear for many retirees.

With today’s low interest rate environment, the 4% rule is no longer a safe bet. A study by Texas Tech professor and Research magazine contributor Michael Finke shows that, because interest rates are about 4% lower than their historical average, the anticipated failure rate for the 4% rule has gone from 6% to a 57%, meaning that if the 4% assumption is used, your chance of running out of money before life expectancy is 57% of the time.

The authors add that, the study found that the failure rate would remain at 18% even if interest rates increase in five years’ time, though there is no evidence to suggest that we will return to 20th century interest rates anytime soon, if ever. The bottom line: it is time to change the 4% withdrawal strategy.

Retirement accounts are not yielding the returns that they have in the past, and the potential of a 57% failure rate by following the 4% rule is something you should pay attention to. Annuity products may have not look so attractive when the 4% rule’s failure rate was 6%, but the current landscape puts annuities in a new light. They should be seen as more attractive than ever because they can guarantee a lifetime income stream, no matter how long you live, and they should be part of your retirement income planning.

Contact your agent of financial advisor for more information.

Marvin H. Feldman, CLU, ChFC, RFC, President and CEO of Life Happens

by Marvin H. Feldman

Marvin H. Feldman, CLU, ChFC, RFC, is president of the Feldman Financial Group in Palm Harbor, Fla., and president and CEO of Life Happens. He is a 41-year Million Dollar Round Table member and was the 2002 president. He is a 33-year member of the MDRT Top of the Table and a past Top of the Table chairman. He also is the recipient of the 2011 John Newton Russell award, the highest honor bestowed on an individual by the insurance industry.

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