Among the more notable recent numbers is the calculation that an estimated 10,000 baby boomers will turn 65 every day until 2030. But in important ways, the financial services industry is ill-prepared for an aging population. The industry is primarily focused on product development and persuasion to increase retirement savings. Far less brainpower is spent devising smart and easy ways for people to turn their accumulated savings into a reliable retirement stream.
“The financial industry is on the verge of a ‘retirement income’ revelation,” Bill Meyer, president of Retily, a fintech company owned by mutual fund company T. Rowe Price, said in a recent webinar. “We need more innovation.”
Financial providers are working to devise better retirement products and strategies. Retirees, on the other hand, often rely on a few guidelines. The most well-known calculation is that a retiree can withdraw 4% of his total portfolio savings in the first year of retirement. The 4% threshold is adjusted annually to account for inflation. The certainty of this approach is that there is a remote chance of running out of funds over a 30-year period. The 4% rule is also easy to follow.
Although the 4% rule is a reasonable standard, it has significant drawbacks. Among them: Retirees often want to make changes to their retirement spending. There are many people who don’t retire for 30 years. Market conditions will affect the amount you can safely withdraw. For example, investment data firm Morningstar calculated the safe withdrawal rate for 2021 to be 3.3% because the market valuation was so high. Morningstar’s latest report says that 4% is currently OK. Rising bond and cash yields increase the prospect of higher future returns. A more moderate inflation outlook will also help.
What does a typical retiree do?
First, the most important decision for the average worker is when to apply for Social Security. Benefits are about 76% higher if you wait to apply at age 70 compared to age 62 (although those in poor health, with caregiving responsibilities, or who are unemployed may benefit from applying earlier). A wise option would be to apply for one).
Second, as the Morningstar authors point out, you need to build flexibility into your safe withdrawal strategy. Several factors influence your flexible approach, including how much you want to leave to your heirs or charity, the extent to which fixed expenses are covered by other non-asset sources of income, your lifestyle goals, and how many years you plan to retire. To do. A combination of planning and disciplined flexibility can help you develop a safe withdrawal strategy for your household.
Chris Farrell is a senior economics contributor for Marketplace. Commentator for Minnesota Public Radio.
