401(k) Specialist Issue 1 - 2022 - 31

401(k) STRATEGIES
" The debate around rate of
withdrawal can take into account
a person's health, spending goals
and other nuances, plus the fees
on the accounts. So, any of the
widely cited withdrawal rates
could be correct depending on
the context. "
- David Blanchett
Income: Safe Withdrawal Rates-one of its
authors thought that readers would focus
on the flexible strategies the team presented
to enhance retirement withdrawals, such as
fluctuating their withdrawal rates by taking
lower amounts in weak market environments
and higher amounts in very strong
ones.
Instead, people " anchored " on the report
estimate that the 4% withdrawal rate should
be lowered to 3.3%, according to co-author
and Morningstar's Director of Personal
Finance and Retirement Planning, Christine
Benz.
She adds that the report, written with
Morningstar colleagues Jeffrey Ptak and
John Rekenthaler, was born out of a desire
to delve into retirement decumulation
strategies, saying that low cash, bond and
dividend yields have caused issues in providing
stable retirement income.
" We wanted to revisit safe starting distribution
rates, " says Benz, and while significant
research has been done on the topic
such as the earlier-cited 2013 report, " it's a
whole different ball game for today's retirees
where every single variable is unknown
and who are contending with challenging
conditions for stocks and bonds. "
In fact, the 3.3% estimate was just that: an
estimate. And a conservative one at that, as
it presumes, 1) a 30-year time horizon that
exceeds many retirees' drawdown periods;
2) fully adjusting all withdrawals for the
effect of inflation; 3) a fixed withdrawal
schedule that does not react to changes in
the investment markets; and 4) a high projected
success rate for the plan (90% chance
of not running out of money). The authors
conclude that some current retirees-for
example, those with a spending horizon of
20 years rather than 30-can safely withdraw
a significantly higher amount than the 3.3%
initial projection might suggest.
Benz explains that at the core of conversation
it comes down to helping people
better plan for retirement because, " it's
important that retirees know what they
could spend and that it's good to have a
starting point withdrawal rate for discussion
purposes. "
This was especially clear to Benz when
she saw a statistic from a Fidelity survey
that found that more than a quarter of
respondents said that they believed financial
experts would recommend a withdrawal
rate of 10 to 15% of retirement savings every
year, an alarming assumption that would
quickly dry up accounts.
Additionally, people are living longer so
naturally, retirement periods are extending,
especially among wealthier adults. There are
even more discussions regarding Social Security
claims and timing, pension decisions,
and the role annuities can play to provide
a lifetime income stream. Further, many
Baby Boomers are retiring without the
aid of pensions and that means that setting
their retirement withdrawal rates is a crucial
decision.
The experts seem aligned on one particular
component: it's time to stop looking in
the past to help predict the future. Echoing
the American College's Finke, Benz says that
it's an understatement to say that history
is an unreliable guide, and the current and
future economic scenarios must have a larger
role when determining safe withdrawal
strategies.
Look Forward, Not Backwards
Retirement research expert David
Blanchett, now the Managing Director and
Head of Retirement Research for PGIM,
brings other variables to the discussion table.
To start, he says Bengen's research was good
for a generalized household and a fine place
to begin. But, in his opinion, the 4% Rule
is improperly named and that it's actually
a 25 multiplier or more simply, the 25x
Rule. Simply, if the target annual retirement
income is $100,000, then the better metric
is the retiree needs 25x that amount-or $2.5
million-for a retirement savings goal (which
does not factor in pensions, Social Security
or annuities).
Blanchett recently produced a study for
PGIM that pointed out that the 4% Rule
only really applies to the initial withdrawal
from a retirement account, since subsequent
amounts are based on that amount, plus inflation.
In further analysis, Blanchett found
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401(k) Specialist Issue 1 - 2022

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