Almost all Fortune 500 retirees require predictable income and protection against a cluster of risks, including longevity risk, performance risk, and sequence-of-returns risk, when they reach retirement.
In the past, Fortune 500 employees have utilized the "4% rule," in which retirees take annual withdrawals beginning at 4% of their portfolio and increasing with inflation. The remainder of the portfolio is then invested at least 50% in equities. Using historical data, this would provide a retired Fortune 500 employee with approximately 30 years of retirement income.
A number of factors may compel Fortune 500 retirees-to-be to reconsider the 4% rule in light of the economy's volatility. It might be advantageous to contemplate annuities as an alternative.
As life expectancies rise, Fortune 500 retirees must plan for expenses spanning an extended period of time. Previously, we would plan for a 15- to 20-year retirement, but now we must plan for a 30- to 35-year retirement. What resources are available to help achieve the 35-year deadline?
The annuity strategy can help avoid some of the pitfalls associated with the 4% rule. For instance, if you require $50,000 per year in retirement for 30 years, you may require $1,200,000 in fixed income at a 3% interest rate. If you choose the annuity option, however, you can fund the $50,000 expense for 30 years with $800,000.
Another disadvantage of the 4% rule is that it may not accurately reflect a client's risk tolerance. After departing Fortune 500, when you are accumulating assets, you can afford more volatility and assume more risk than when you are in retirement and withdrawal.
In addition, should the market decline, you would be able to reduce your income using the 4% rule, whereas you cannot do so if you elect for an annuity.
With that under consideration, it is also worthy to note how a study conducted by the Stanford Center on Longevity suggests that a combination of annuities and systematic withdrawals from an IRA could also be an effective retirement income strategy for Fortune 500 employees. This strategy, known as the "Spend Safely in Retirement" plan, proposes allocating a portion of retirement savings to purchase a qualifying longevity annuity contract (QLAC). The QLAC provides a guaranteed income stream starting at an advanced age, such as 80 or 85, while the remaining savings are invested in a diversified portfolio and subject to the 4% rule. This approach aims to provide both protection against longevity risk and the flexibility to benefit from potential market growth.
Conclusion
Imagine you're embarking on a cross-country road trip in your retirement years. You have two options for managing your travel expenses. Option one is like having the freedom of driving your own car, where you can make spontaneous detours, explore hidden gems, and experience the thrill of the open road. Similarly, opting for a lump sum withdrawal from your retirement savings gives you the flexibility to adapt your financial plan based on your changing needs and desires. Option two, on the other hand, is like booking an all-inclusive guided tour. While it provides a sense of security and a predetermined itinerary, you may miss out on unexpected adventures and opportunities that come with the flexibility of a lump sum. Both annuities and lump sum withdrawals have their merits, and it's essential to consider your own preferences and financial goals when making this decision.
This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.
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