RISk vS. SAFE RETIREmENT INcOmEIn 1994, William Bengen published a paper in the Journal of Financial
Planning. This article has had the biggest impact on retirement income
planning. It was titled “Determining Withdrawal Rates Using Histori-
cal Data.” Bengen looked at actual Stock Market returns and retirement
scenarios over the past 75 years.
He concluded that retirees who draw down no more than 4 percent of
their portfolios every year stand a chance their money will outlive them.
Retirees who draw down 5 percent a year run a 30 percent chance of
jeopardizing their nest egg and those who take 6-7 percent are taking a
much greater risk.
A 2006 study by Ibbotson Associates, an affiliate of Morningstar Inc.,
found that systematic withdrawals from retirement savings plans can be
problematic if individuals withdraw more than 3% to 4% annually. The
study found that, based on historical rates of return of a balanced stock
and bond mix, a 7% annual withdrawal rate lasts just nine years. At a 5%
withdrawal rate, the money lasts about 22 years and individuals would
have to reduce their withdrawal rates to 4% or less to make portfolios
sustainable for at least 30 years. It’s easy to see where the broker went
wrong with this information. He was having Ms. Browne take out way
too much money from her portfolio. He set her up with the expectation
that she could take a $70,000 a year income from her $1,000,000 401K
account and never run out of money. Now to the defense of the Broker.
He did not know that a 2008 was looming in the future. However, if you
want predictable income during retirement, you should never have that
income tied to an account that has risk.
Unfortunately, there was nothing I could do to help Ms. Browne. The
damage had been done. If we could go back in time and I had met Ms.
Browne back when she retired, we would have done things a lot differ-
ently. We would have used a Hybrid Annuity for a few different reasons.
First, it provides a safe guaranteed lifetime income that she could never
outlive. Using the rule of 100, when Ms. Browne retired at age 69 we
could have put 69% or $690,000 in a Hybrid Annuity for guaranteed
lifetime income. She could have taken a guaranteed withdrawal of 5.9%
a year for the rest of her life at that age, which would be right around
$40,000 a year. Then she could have kept the other 31% or $310,000
in a brokerage account with the potential for future growth. Taking 4%
(less the 7% she was taking) withdrawals from that account she would