James Lorenzen, CFP®, AIF®
For years we’ve heard about “The 4% Rule”. Of course, that’s when the markets seemed to be going up all the time. In recent years, due to low interest rates and increased market volatility introducing everyone to sequence-of-returns risk, – I even did a webinar on this topic – many advisors have dialed back the 4% withdrawal rate to 3.5%
Testing with annuities
A Journal paper in December 2001 by Mark Warshawsky and co-authors John Ameriks and Bob Veres introduced the use of immediate annuities into the retirement discussion. In his current contribution, Warschawsky examines the use of immediate annuities combined with a fixed withdrawal percentage from a total-return portfolio. The conclusions  were:
- The 4% rule tends to fail when utilized for extended periods, i.e., 30 years, whereas immediate annuities provide continual cash flow, regardless of market or economic
- A 3.5% or less is often more appropriate than 4% (for obvious reasons).
- When incorporating an immediate annuity at age 70, the annual payout almost always exceeds the 4% rule and does not risk full income or running out of money – in essence it’s purchasing an unending cash flow that, testing shows, exceeds the 4% rate.
Immediate annuities offer many advantages, but they likely not suitable for those with impaired longevity, liquidity needs, and adequate pension income. If you like to learn more, you can access the Income Annuity Primer.
Testing with insurance
Wade Pfau, in a paper commissioned by OneAmerica, addresses this issue in three scenarios:
- Investments combined with term life insurance
- Investments, joint and 100% survivor annuity, and term insurance
- Investments, single life annuity, and whole life insurance
He compared these three approaches for 35 year-old and 50 year-old couples. Without getting into the weeds, I just say his study found a “substantive evidence that an integrated approach with investments, whole life insurance, and income annuities provide more efficient retirement outcomes than relying on investments alone.” It’s not an either/or decision.
Withdrawal strategies vary beyond what’s been discussed here, of course, which is why professional help can be very important and the difference of even hundreds of thousands of dollars.
It pays to do your homework and have a good guide.
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 Journal of Financial Planning, January 2016
Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991. Opinions expressed are those of the author and do not represent the opinions of IFG any IFG affiliate or associated entity.The Independent Financial Group is a fee-only registered investment advisor with clients located across the U.S. He is also licensed for insurance as an independent agent under California license 0C00742. Jim can be reached at 805.265.5416 or (from outside California) at 800.257.6659. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.