To
their credit, several groups have attempted to help fill this void of
information including the retirement planning industry, the financial media and
academia. But while this effort is in part commendable – after all, some
information is better than no information – it is also hazardous. When
attempting to educate the broad, general public, assumptions have to be made for
the intended audience. And therein lies the problem: we believe retirement
planning is a very specific, personalized process. Just like everyone’s
fingerprint is unique, so too should be their retirement plan.
However,
too many people are taking what are meant to be general “rules of thumb” and
accepting them as universal truths. There are two examples that we will
address: the safe withdrawal rate and the percentage of working income you need
to replace in retirement.
The Safe
Withdrawal Rate
The
safe withdrawal rate is an academic exercise intended to account for the
uncertainty of the markets with the desire for certainty in retirement income.
In essence, the research runs thousands of potential future market returns
based on historical data and determines how much an individual can withdraw as
a percentage of their portfolio and have confidence their income will last
their retirement. Today, 4% is widely accepted as the safe withdrawal rate. In
other words, if you have a starting retirement portfolio of $1,000,000, you
should be able to withdrawal 4% or $40,000 each year, adjusted for inflation.
There
are a few issues that most people don’t realize with these studies. First, the
confidence is not 100%. If you actually read the research, it is generally
between 85-95% confident that the retirement income will last. Second, it is
not confidence for an unknown retirement, but a 30-year retirement. What does
that mean for those who might find themselves in the 5-15% of the scenarios
where the income won’t last? What does that mean for those who might have a
retirement that lasts more than 30 years? Those are still risks that most
retirees are not comfortable taking.
Even
more, the research has changed over time. It was not too long ago that 5% was
considered the safe withdrawal rate. And today, there are some researchers who
are now challenging that 4% may be too high. For retirees looking for
certainty, the safe withdrawal rate falls short.
The Necessity for
an Individualized Retirement Plan
At
Kemp Harvest Financial Group recommend that everyone have an individualized
retirement plan that is designed around their specific circumstances and goals.
More importantly, we believe this plan should provide a degree of certainty
through the plan design itself, not in general concepts or rules of thumb. When
it comes to retirement planning, one size does not fit all.
For
more topics like this, check out our radio show “Retirement Plain and Simple”
every Saturday morning at 8 on WNPV 1440 AM and like us on Facebook!
If
we at Kemp Harvest Financial Group can help you in
any way with regard to your financial planning needs, please feel free to contact us.
Photo Credit: Ben Watkin
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Author: Todd Little, CFP®, AIF®
