How Do You Help Clients Understand the Impact of Withdrawal Rates On Retirement Savings?

When considering a withdrawal rate for your nest egg, you must analyze the risk of your portfolio and your age. If your portfolio is highly dependent on the market, your withdrawal rate must mirror the gains and losses. If the market is gaining, you can withdraw more, and if the market is down, you must curb your withdrawals accordingly. Otherwise, you may become a victim of what's called 'sequence-of-returns' risk. In other words, you can't withdraw too much if the market is in rapid decline. To avoid taking too much at the wrong time, consider redirecting a portion of your portfolio into a safe fixed or fixed-index annuity, which you can withdraw from in the down years. How much should you redirect? A simple formula is to use the percentage of time the S&P 500 finishes the year up, for example, 73%, and redirect 27% into a safe account to draw from in the down years. This includes required minimum distribution (RMD) withdrawals mandated by the IRS. Utilizing this type of strategy will give you greater flexibility with your withdrawal rate as well. You can make it much more technical and complicated, but remember this: NEVER take money from your portfolio that is losing value.

I take several steps to assure that clients know how much their withdrawal amounts from their retirement accounts can impact them over a 20- to 30-year period. When my team and I do projections, we analyze how downturns or increased volatility in the market earlier in retirement can hurt them. This is known as sequence-of-return risk. We continually update the client's plan, and as such, we perform updates to see if we're on track or if adjustments need to be made. We also show them scenarios of a market period and how withdrawals can impact their accounts in those periods of time. We also explain that there is no one-size-fits-all plan and everyone's situation is different. The most important thing as you enter retirement is to attempt to achieve more consistent returns versus attempting to achieve higher returns. An example would be 5 or 6% returns as a goal versus 8-plus percent returns.

Within our planning software, we are able to model different withdrawal rates to not only show people the impact withdrawal rates can have on their retirement savings, but also show them the impact bigger drops in the market have on their ability to maintain withdrawal rates. We're able to show them how those withdrawal rates could have performed in the worst economic times in U.S. history, such as the Great Depression, the Stagflation Era of the '70s, the Dot-Com crash, and the Global Financial Crisis. We are also able to model how having the right amount of Protected Lifetime Income can help to safely boost their withdrawal rates.

We use planning software to model the client’s withdrawal rate in retirement based on their spending, portfolio size, and growth/inflation assumptions. Then, we stress-test the plan to demonstrate the impact on retirement savings if the portfolio growth is lower, inflation is higher, and/or the client spends more than they planned during the early retirement years. For clients with higher discretionary spending capacity, we demonstrate how reducing spending during adverse market conditions can improve their long-term outlook. By addressing this possibility in advance, we help prepare these clients to adjust towards lower spending if necessary. For a client with a tighter budget, stress testing might lead them to start retirement at a lower spending level and adjust it after a few years. Withdrawal rates are dynamic, so reassessing a client’s financial plan regularly is key.