More Than Withdrawal Strategy Needed for Retirement Income

Fifty-six percent of Americans do not have a retirement income strategy, and among those that do, the most sophisticated plan is simply withdrawing money from savings accounts, a tactic that LIMRA does not recommend.

Among the 44% who do have a plan, 60% plan to withdraw from their savings only occasionally or when needed, and 32% intend to make regular withdrawals from their savings, according to LIMRA research. This could increase their risk and reduce the number of years their money will last, LIMRA says. Only 20% plan to convert their savings to guaranteed income.

Earlier research from the LIMRA Secure Retirement Institute found that people might withdraw too much each year. Even if they apply the widely recommended 4% withdrawal every year, their portfolio is still subject to market swings. As LIMRA puts it: “History has shown us that a truly safe maximum withdrawal rate is an elusive figure.”

People are also living longer. LIMRA has found that there is a 50% chance that at least one member of a 65-year-old couple will live beyond age 88, and a 25% chance one of them will reach age 97. “The couple in this example would need an income source that lasts 30 years or longer,” LIMRA says. “If they pursue only a withdrawal strategy, they risk not having enough financial resources for the last years of their lives.”

In addition to volatility and longevity risks, the Defined Contribution Institutional Investment Association points to inflation and consumption risks. Then there is the issue of rising health care costs for retirees.

While retirement plan sponsors are beginning to consider offering guaranteed retirement income options, the majority are waiting for safe harbor regulations from the Department of Labor.