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withdrawal rate for individuals depends on their own situation,
and needs to account for a range of factors including retiree
age, spending flexibility and bequest motivations, says David
Blanchett, head of retirement research at PGIM DC [Defined
Contribution] Solutions in Lexington, Kentucky. In most
cases, making that determination requires working closely
with a financial professional who can help them calculate their
income needs.
" We don't tend to think that people really live by any safe
withdrawal rate, " says Roger Young, a senior financial planner at
T. Rowe Price in Owings Mills, Maryland. " People need to make
adjustments over time as things change for them, so we would
prefer that they not anchor to a particular perceived rate. "
For example, younger retirees might take a larger percentage
out of their retirement accounts in the early years of retirement in
order to put off claiming Social Security, a move
that would allow them larger Social Security
payments later and enable them to reduce those
withdrawals, Young says.
Still, the 4% rule can provide a handy rule
of thumb for back-of-the-envelope calculations
to determine whether near-retirees are on track,
Young concedes.
" It's one gauge for seeing whether you're
ready to retire, but it's only one gauge, " he says.
A Morningstar analysis published last
plan at a given recordkeeper, what do the tools say, and what's
good or bad about that projection? "
Targeted Messaging
Experts say that while calculating withdrawal rates is a key
component of retirement planning, it is an area that participants
can wait to think about until they are approaching retirement.
So, a targeted messaging approach likely makes the most sense.
Besides targeting by age, messaging about withdrawals and
retirement income might also consider other factors, including
the participants' account balance.
" At a large employer, there are folks with a $20,000 account
balance and those with a $2 million account balance, and they
might both be ready to retire, " says Nathan Voris, head of channel
strategy workplace and retirement services at Morningstar in
" What plan sponsors should do
is, when they're communicating
with the plan participants, try
to get them to think about their
entire financial picture. "
November found that the 4% withdrawal rate would give retirees
a 90% probability of still having funds after 30 years. It is worth
noting, though, that the report also said the safe starting withdrawal
rate was 3.8% in 2022 and only 3.1% in 2021. The higher
rate in 2023 reflected higher fixed-income returns and lower
long-term inflation projections.
New Focus for Sponsors
Withdrawal strategies are an aspect of financial wellness that plan
sponsors increasingly pay attention to, as more sponsors encourage
participants to remain in their plan through retirement, a shift
that requires a focus on decumulation as well as accumulation.
" There needs to be more education on how to formulate that
retirement income plan, " Young says. " Beyond education, it might
involve tools or giving people access to true, personalized advice. "
But determining a safe withdrawal
rate and measuring
successful outcomes pose challenges.
" You can fall one dollar short in your 35th year of retirement,
and, depending on the model used, it will say that you failed, "
Blanchett says.
The takeaway for plan sponsors, in this case, according to
Blanchett, is that helping participants with this part of retirement
planning will likely require third-party help.
" There are going to be very few plan sponsors that have the
nuances of stochastic retirement-income planning, so it's incumbent
upon their advisers and consultants to understand the tools
available in a given plan, " Blanchett says. " If you're leveraging a
Richfield, Ohio. " Those two people need very different guidance. "
The worker with a $20,000 balance, for example, is apt to
need tools to help him optimize Social Security and analyze the
best Medicare supplement plan for him, while his co-worker may
be well served by meeting with a financial adviser, if the person
does not have one already, Voris says.
The Plan Sponsor Role
While plan sponsors likely will not be getting into the nitty-gritty
of calculating withdrawal rates, they do have a role in helping
participants execute their chosen strategy. This may require
having partial or systematic withdrawal options, target-date
funds that go through retirement, or managed accounts.
" What plan sponsors should do is, when they're communicating
with the plan participants, try to get them to think about
their entire financial picture, " Eftkhari says. " Almost like taking
a financial planning approach, getting them to think about their
income and expenses now and in the future, and to get a sense of
when they're going to take Social Security. "
For some plans, offering annuities might be part of the
conversation with participants about how to create a retirementincome
plan that works for them.
" Plan sponsors [focused on retirement income] need to get
more annuities into the plan to provide that simplified, guaranteed
monthly paycheck, rather than thinking that everyone
is going to work with a financial adviser and understand the
complexities of the 4% rule, " Lau says. -Beth Braverman
PLANSPONSOR.COM May - June 2024 37
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