As the COVID- 19 pandemic and market volatility continue, advisors need to speak to clientsabout shifting withdrawal rates, according to two retirement experts who spokeduring a recent ThinkAdvisor webcast.
“The first quarter was really a wild ridefor equity investors,” David Blanchett,head of retirement research forMorningstar’s Investment ManagementGroup, told listeners, adding “we’re ina really unique time” right now. Clientswho have been accumulating theirwealth for 30 or 40 years are those whoare most affected by the current turmoil.
Blanchett and Michael Finke, direc-
RISK AND THE 4% RULE
tor of the Wealth Management Certified
Professional program at the American
College of Financial Services, explored
how buffer assets can affect retirement
income success and why retirement spe-
cialists now are taking a more nuanced
view of “safe” initial withdrawal rates
than in past years.
The pandemic has highlighted one portfolio weakness — namely, it “almost seems asif risk is not a real concept” to many clientsanymore, according to Finke. After all,for the past decade, “the market’s prettymuch” done nothing but “go up,” he noted.
When many clients see analysis claim-
ing they have a 94% chance of success in
retirement, they think that means there’s
a 94% likelihood they can maintain their
lifestyle throughout retirement, Finke
explained. Also, many believe that if
they’re relatively conservative at the start
of retirement, they’ll be relatively fine
through retirement — no matter what.
“But the reality is you get unlucky, and
that’s what risk means,” he pointed out.
“If you’re going to take risk in retirement
with your investment portfolio, then that
means that there’s a possibility that you
could draw the wrong card the first year.”
As an example, Finke pointed to a
Monte Carlo simulation in which a client
retired Feb. 20 and chose a 3% withdraw-
al rate under the 3% rule. “You would
have had a 94% chance that you could
maintain, say, $30,000 plus inflation each
year in retirement from a million-dollar
portfolio” at that point, he said.
However, by the time that client gotto March 12, he or she would have hadonly a 64% chance to maintain thatsame $30,000 plus inflation each year inretirement, Finke explained.
That underscores why the traditionalmethodology of thinking about retirement withdrawals from a risky portfolioto fund a safe and stable income in retirement is “not exactly realistic,” Finke said.
Instead, there are many events thathappen during the course of one’s retirement that affect this scenario. “Thoseevents will change your reality everyyear, and you have to adapt to the newreality,” he noted.
The traditional 4% rule is a “fluke” ofthe United States in the 20th Century,Finke said. Failing to adjust one’s spending each year in retirement hasn’tworked well in other countries, and itmight not work well anymore in theUnited States either. This is because of
The Impact of COVID- 19
& Market Turmoil
The 4% rule is “a fluke,” and other tacticsshould be used — especially for those close toretirement, experts say.
RETIREMENT PLANNINGBy Jeff Berman