Creating an adequate amount of income for individuals to live comfortably in retirement will require a combination of several income producing strategies, as well as knowing what constitutes realistic and "safe" withdrawal rates from retirement plans, according to a recent issue brief by the Institutional Retirement Income Council.
For individuals not to outlive their retirement funds, they need to treat their retirement plan account balances as a source of monthly income rather than as personal wealth, according to the report.
"Many retirees believe they can withdraw 10% or more of their retirement savings each year and still have enough money to last their lifetime," says Fred Reish, an IRIC member and a partner at Drinker Biddle & Reath LLP, who co-authored the issue brief. "However, given the statistical chance that at least one spouse in a married couple age 65 will live another 30 years, 'safe' withdrawal rates are much less than most retirement plan participants think. In fact, anything greater than 6% results in a significant risk of exhausting retirement funds while the individual is still alive. This will be shocking to many participants."
There are many different strategies the report goes over that will produce a safe withdrawal rate for individuals who participate in their employer's 401(k) or 403(b) retirement plans. By safe, the issue brief means a withdrawal rate from retirement plan funds which has a high degree of probability of lasting, or payments from an insured product that are guaranteed to last for the participant's lifetime.
Strategies include:
* Withdrawing funds at a 4% rate in the first year of retirement, followed by inflation-adjusted withdrawal rates in later years.
* Using all or part of the lump sum retirement savings to purchase an annuity for the retiree's life, the joint lives of the retiree and spouse, or with a feature that guarantees payments for life with a specific minimum period.
* Purchasing a guaranteed minimum withdrawal benefit that permits a retiree to maintain some control of the retirement funds but at the same time provides a guaranteed benefit.
"It is likely that no single strategy will cover a given retiree's needs or desires for retirement income. With baby boomer retirements now beginning, we believe that a variety of strategies will be used by individuals, and it seems likely that, for many retirees, a combination of these approaches will produce the best outcome," Reish says.
Safe withdrawal rate 'critical for retirees'
The issue brief also notes that creating safe retirement income is a multifaceted task, requiring an understanding of longevity probabilities, withdrawal rates, the impact of inflation, asset allocation and the sequence of market returns.
"The issue of a safe withdrawal rate is critical for retirees," Reish says. "The faster that money is withdrawn from retirement savings, the greater the likelihood that the funds won't last a lifetime, unless the retiree purchases an annuity or a guaranteed income product. Plan participants need to understand that their account balance is not wealth, but a source of monthly income, and that funds must be withdrawn on a disciplined basis in order to last."
The full brief, entitled The Problem With Spending Too Fast: Retirement Savings Withdrawal Rates, is available on IRIC's website.
Stable-value funds work for some
With worries over fiduciary responsibilities, stable-value funds - which offer steady and predictable returns consistent with a conservative principal protection vehicle - can be a solid retirement plan option for certain segments of a workforce, according to experts who spoke at this year's 401(k) Summit sponsored by the American Society of Pension Professionals and Actuaries.
Most stable-value investments - accounting for 13% of all defined contribution plan assets - generally are a good match for risk-averse near-retirees who want a core portfolio with an attractive return or other employees seeking an alternative to money market funds and short-term bond funds.
"It's a good product that serves a purpose for retirees who are at the doorstep of retirement trying to figure out what to move into," said Rod Bare of Russell Investments. "It's been a rough few years; now is a good time to upgrade your plans if they have a weaker stable-value fund provider."
However, financial advisors sometimes have a hard time picking the right stable-value fund, as there isn't a common database to compare. "Analytics on stable value take a lot of homework, but try to get a good sense of a reasonable structure," said Gina Mitchell of the Stable Value Investment Association.
Across the board though, stable-value funds are reliable investments, with almost the same rate of return from 1989 to 2010.
"Recent market turmoil in 2008 shocked a lot of folks ... and it woke folks up to the complexity of the market," Bare said.
Although many plan sponsors wanted to drop stable-value funds due to regulations as a result of the financial collapse and other market changes, Bare cautioned against that.
"Work through the decision carefully because with the right provider, [stable-value funds] can be the right product that can serve the right cohort well," he said.
