Schroders Global Investor Study 2019 found the average percentage of retirement savings people in the U.S. think they can realistically take out each year during retirement and not run out of money is 10.1%.
The vast majority (83%) think they can take out 5% or more, with one-quarter indicating they believe they can withdraw 15% to 20% each year and not run out of money. “When I saw 10.1%, I thought this was very unrealistic. It’s a very big risk. We think longevity is such a specific risk to retirees,” says Amy Diesen, vice president, retirement plans, at Ameriprise Financial in Minneapolis. Although there is no true magic number, Diesen points out that a popular rule of thumb is 4%, “but there are so many things to consider.”
Research has shown that even 4% is not realistic for everyone. Not only is the 4% rule not necessarily right for every person, it may not be right for every point in time, Michael LaBrie, president of Compass Point Retirement Planning in Wakefield, Massachusetts, previously told PLANSPONSOR.
Sri Reddy, SVP of Principal’s Retirement and Income Solutions, based in Des Moines, Iowa, says Principal has run similar studies and found retirees think they can take between 7% and 14%. “This is not good. If a retiree earning 3% post inflation takes 10% out of savings each year, his money will last 10 years and 11 months. If he takes 5%, it will last 30 years, and at age 65, the probability is he will live around 25 or 30 years or longer,” Reddy says. He points out that if interest rates go lower, earning 3% will be harder.
Considerations for a realistic draw down rate
According to Reddy, the amount individuals have saved and the state of their health factor into determining a realistic draw down rate in retirement, but even more than that, they need to consider other sources of income. He says guaranteed sources of income—Social Security, pensions or annuity payments—can go toward covering fixed expenses in retirement. Once individuals figure how much savings they have to allocate toward that, they can plan for other expenses.
Whether an individual plans to work in retirement and generate additional income also factors into the draw down rate equation, Reddy says. And, where an individual plans to live determines the cost-of-living, taxes and access to health care.
In addition to all income sources, the timing of taking Social Security and whether an individual has health care benefits in retirement play into the calculation of a realistic withdrawal rate, Diesen says.
She points out that an EBRI/Greenwald survey found four out of 10 individuals retired earlier than planned, for various reasons. A Prudential study found 51% of retirees retired earlier than planned. This means they start with less savings to draw from than expected, Diesen says. Individuals should have a plan in place for this.
Plan sponsor help with realistic expectations
The path to accumulation is different from the path to decumulation,” Diesen says. “It’s like climbing Mount Everest; it’s hard, but if you plan appropriately, you can make adjustments,” she says. “Once you get to the top, on the way back down you don’t have a safety net.”
An example of an accumulation adjustment Diesen offers is for someone who didn’t start saving soon enough. “It doesn’t mean, he can’t, at age 40, start saving at a meaningful rate, use the ability to make catch-up contributions at age 50, enable auto-features in his retirement plan to increase savings, or even get a second job,” she says.
According to Diesen, retirement plan sponsors can help employees understand that decumulation is different and the need to get it right. Employees need education about retirement income, they need to have a written plan that is flexible and realistic, they need realistic health care expense numbers, and they need flexibility in their retirement plans, she says. Flexibility could be plans for getting a job, spending less in certain years, or downsizing a home, she explains.
Diesen also says tools and calculators are an important piece for determining a realistic retirement draw down rate. Some calculators predict income in retirement at different savings rates. Diesen adds that availability of face-to-face planning with an adviser provides a solid basis for a great result for employees.
Reddy says “the singular best thing” to do for retirement plan participants is to include a projection of monthly income in retirement, in boldface, on account statements. “Understanding that $1 million translates to only $4,000 a month will go a long way” to helping employees establish a realistic retirement drawdown rate—or to even save more, he says.
Employees also need to understand longevity. Reddy points out that the average life expectancy is 85 for both males and females, and in a couple, one spouse has a one in four chance to live to 95. “That’s up from 92, and it will only move upward,” he says. “To replace their current lifestyle people will have to have more saved because they will live longer. This includes more savings for health care expenses.
“I think we are seeing now, especially when it comes to women, people are spending almost as much time in retirement as in the workforce. So it is important to plan for retirement, and employers can help support employees,” Diesen says.
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