Anil Vazirani: Safe Withdrawl Rates, defining and explaining sequence of returns risk, and what can be done to try and reduce these risks. I was joking with Jon, a safe withdrawl rate it’s kind of an anomaly purely from the standpoint that if you have stock market investments that fluctuate on a daily basis and there are risks and potentially high fees, you know the term ‘safe withdrawl rate’ would be an anomaly, because how can you have a ‘safe withdrawl rate’ from an unsafe or a risky investment?
Jon Armstrong: One of the articles that I’ve referenced in the past was from the Journal of Financial Planning, it’s a few years old and it was taking about the ‘safe withdrawl rates’ with stock market portfolios and it said that people who take the 4% rule, or 4% of their investment, it has about an 18% chance of failure. For today’s show I wanted to try to find something that was a little bit more relevant and I found an article from Financial Advisor Magazine from Sept. 2015 by Wade Dokken and Wade Pfau, Ph.D., and in that article I’m just going to summarize it pretty quick. It talks about just the concerns more relative to 2015. It says new research shows that Americans retiring in 2015 need to be far more conservative in their withdrawl rates during retirement. The historic 4% annual withdrawl rate is over 2x the level that Americans can safely withdrawl without outliving their assets. The real ‘safe withdrawl rates’ and this of course is according to their research, which accounts for fees and then the stock market performance up to date with the bond market levels, is actually under 2% Anil. Think abut that. They’re saying the ‘safe withdrawl rate’ is only 2%. So someone with a million dollar portfolio, if they were to retire, can expect to take $20,000 from that portfolio in order to have it last.
Anil: Jon, we are going to show that that is kind of flawed, provided if you use the right investment vehicles, that may not aply to it, but I’ll let you finish that article and then we’ll come up with some solutions.
Jon: Correct, yes and this is of course only saying if you have 100% of your money at risk, this isn’t saying this is the ‘end all, be all’ that this is the only option out there, what this is saying is to account for today’s volitility, all the topics that you cover Anil in your workshops and on the radio, about just the safety of trying to be in the stock market today if that’s going to be your primary spot for taking money, it’s saying that you need to be cautious of that and to reduce the amount that you’re taking.
Anil: And let’s also dispel another myth, you know the article says provided that your investments are in stock market type fluctuating risky investments, so safe withdrawl rate which used to be 4% have gone to maybe 3 or 2%. But you know a lot of these folks are not bringing out the true dangers of high risk high fee variable annuities, you know especially the one with Jackson National that grows at a simple interest return on the income account value of your living benefits, it’s a simple interest roll up, not even a compound, and what they’ve done to the risk high fee variable annuity is that these insurance companies have got these fees so high between 3-4%, on an average annually, but they’ve also reduced the lifetime income payout percentage. So it’s not just stock market investments like stocks, mutual funds, or stock funds, we really need to educate the consumer on pitfalls of the risk high fee variable annuities as well that tie into this article.
Jon: Absolutely, and also to pick up on this idea Anil, when people are taking their payments from the high risk high fee variable annuities, they need to know if that’s a single payment, or a joint payment and in most cases we fiund it’s single payment on that type of account.
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