Forget the 4% Rule and Withdraw 10% Every Year With Annuities in Retirement

 

Dave Ramsey recently caught a lot of flack for telling people in retirement or approaching retirement that they should put all their money in stocks and withdraw 8% a year. The criticism came from retirement experts and investment advisors that said, “No, you should stick closer to 4%. It’s just too much to withdraw 8% per year.”

The 8% Withdrawal Debate: Risk vs. Reward

Last week, we did a video analyzing the viability of withdrawing 8%. The cliff notes of that video was that, yes, it could quite possibly work very well if the stock market performs at a very high level for many years. On the other end of the spectrum, it could end in catastrophic failure. The range of possible outcomes is just as big as the section of I-10 right outside of our office that’s 20 lanes wide. It’s the biggest stretch of I-10 in the entire country.

Most of our clients are people just like you. They don’t want to put 100% of their money in the stock market because they realize it could end in catastrophic failure. The question is, how much can we securely withdraw from our nest egg in retirement, or a portion of it if we dedicate it to an income bucket, without the fear of running out of money, without jeopardizing our security? In today’s video, I’m going to show you how you don’t have to follow the 4% rule. You can withdraw 9%, 10%, 11%, 12% of your original deposit and not be afraid of running out of income.

There’s a reason that ancient parables are still said today. It’s because they still have meaning in today’s world. The one we’re going to talk about in this video is that a bird in the hand is worth more than two in the bush. Now, the meaning is quite simple. We’d rather have something today that we can touch, that we can feel, we have some certainty, we know what it is, that is more valuable to us than something that could potentially be, but may not be, in the future.

By the end of this video, I think you’re going to be blown away when how much income you can have securely, and I’m going to prove it to you mathematically, without taking a tremendous amount of stock market or bond market risk. If you decide at the end of this video that you like more income than less income, and like thousands of Americans every single year, you want to incorporate something like this into your retirement for a portion of your savings, there’s a link in the description that will lead you to a form fill, and you can fill that out and we’ll reach out to you. We’re also going to put a phone number in there if you just want to go ahead and give us a call and reach out to set up an Explorer meeting.

Exploring Alternatives to the 4% Rule

All right, I told you I was going to mathematically prove this to you, and in order to do so, I have to provide some context. First thing we’re going to look at here is taking $500,000, assuming we want to retire or take income in three years, at the end of 3 years, or 5, or 7, or 10. Let’s say I’m 57, I want to retire in three years, if I invest $500,000 and earn 10% a year, what’s it going to grow to? Then if I follow the 4% rule, how much income will that provide me? Okay? We’re going to look at 3, 5, 7, and 10 years.

100% stocks, obviously that creates a wide range of possible outcomes. If I can achieve 10% every single year over the next three years, my money will grow to $665,000. If I withdraw 4%, because retirement is starting then, or I want to defer Social Security longer, so I take it for my investments, whatever it may be, I get $26,600 per year. Now, this yield on original capital, all we do is we take the income that you’re generating, divide it by your original investment, and then you get the yield on your original capital.

Yield on cost is the finance term, and it primarily refers to income investments like dividend stocks, when you reinvest, buy more shares, get more dividends. We always want to look at yield on cost or yield on capital. Now if I want to retire in five years or if I plan to start taking income because maybe I have some restricted stock, or I have a pension, or I have some type of income that is giving me what I need now, but then there’s a gap in five years, I want a tool or a strategy that’s going to help fill that gap in five years. It could be an investment bucket.

This is what we’re looking at, 10% a year, the $500,000, filling that gap, taking income in five years, provides me growth of my value up to $805,000 multiplied by 4% for the 4% rule, I’m getting $32,200 of income. 7 years, $38,960, and in 10 years, if I average 10% per year, my money will grow to $1.3 million, and I can withdraw $52,000 a year if I follow the 4% rule.

Mathematically Proving Secure Retirement Income

Okay, same chart here, so I’m just going to focus on the income, but this is a more reasonable. Let’s assume you’re 60% stock, 40% bonds, and you average 7% every single year for the next 3, 5, 7, and 10 years. Your annual income, of course, is going to be less because you average 7% instead of 10%, and if we follow the 4% rule, our starting income at the end of three years is $24,000, $28,000 after five, $32,000, and $39,000.

Now we all know, if you do decide to invest 100% in stocks and you’re close to retirement or in retirement, things could go awry. What this chart simply shows us is, okay, if we put $500,000 in stocks and things don’t work out, when we want to start retirement income, in three years it really could be worth $250,000, or maybe in five or in seven, it could be worth $375,000, or maybe, like the lost decade from 2000 to 2009, where the stock market actually averaged about negative 1% per year, 10 years later, you could still have maybe the same amount that you started with.

This is what’s in the bush, the bird in the hand versus the two in the bush. It’s more valuable to have something that we know and is of certainty today than what could potentially be in the future. This is the downside of getting aggressive, especially right before retirement when we need to generate income from our assets, is we could average 10%, we could average 7%, but we could also end up with a bad outcome.

For the bad outcome, we just create the same analysis here. If we withdraw 4%, we could have $10,000 a year, $15,000, or maybe $20,000 a year. This chart is a summary of the previous three charts that we looked at, and I created a range of possible outcomes. Retiring in 3 years, or in 5, or 7, or 10, and again, you don’t have to retire maybe in 3, 5, 7, or 10 years, but maybe you have an income source that is either going to go away, or you need more income at this certain point in the future.

Taking income in 3, 5, 7, or 10 years, we’re looking at the bad scenario that we just looked at, what we really don’t want to happen, but the truth is, if we put 100% of our money into stocks, it could happen, versus the really good scenario, if we average 10% a year for 3, 5, 7, or 10 years. All we’ve done here is summarize the previous charts, creating a range of possible outcomes, and this is what we call really income hoping in retirement, as opposed to income planning. This is two in the bush, maybe it’s one in the bush, or two, it could be three.

Either way, we don’t know how much income we’re going to be able to generate, because the stock market doesn’t come with any guarantees, but the range, based on everything we’ve looked at so far, between $10,000 to $26,000 per year, reasonably, we could maybe take a little bit more, stretch it up to 4.5%, 5% distribution, if you want to get aggressive above the 4% rule, but reasonable range. $10,000 to $32,000 in 5, $20,000 to $38,000 in 7, and $20,000 to $52,000 in 10 years.

Guardrails for Retirement Investments

For those of you who watch a lot of my videos, and have been longtime followers to this channel, you’ve heard me talk about guardrails in the context of your overall investment principle. If you invest aggressively, and you are 100% stock, your guardrails for that portfolio, statistically speaking, because we can statistically analyze any combination or group of securities, and see how they interact with one another historically, to create a 95% probability model of what a potential outcome is for any given year.

Fancy way of simply saying, if you invest a certain way, let’s say 100% stocks, $500,000, there’s a 95% certainty that it may, within 12 months, be worth $800,000 or $900,000, or possibly worth $200,000 or $300,000. An aggressive portfolio creates very wide guardrails for your asset base. Same concept here with income. You also have income guardrails when it comes to investing, however you decide to invest the money for retirement, and trying to project out how much income that asset base that you have, based on how it’s invested, what is the range of possible income it could generate when you need it.

All right, I told you I was going to mathematically prove it to you, and here we are. The same $500,000, no investment in stocks or bonds, just a fully guaranteed by the claims paying ability of the life insurance company contract, has a built-in, guaranteed interest rate, guaranteed distribution factor. If you want to take income in 3 years, $42,110, in 5, $49,000, in 7, $59,000, in 10, $78,000. Significantly more income for joint life, so I have joint lifetime income here, that’s you and your spouse. If you’re not married and you’re a single individual, the same math, these numbers would be slightly higher, probably $3,000, $4,000 more per year.

Here we have one more example, this is a 62-year-old person, so you want to retire or take income in 3 years, or in 5, or in 7, or in 10. By the way, the previous one we looked at assumed a 57-year-old, so 57 wanting to retire at 60 or take income at 60. 57 wanting to retire at 62 was the five-year example. Here we have a 62-year-old that wants to retire in 3, or 5, or 7, or 10. $45,000, $54,000, $64,000, $83,000 of guaranteed income with no stock market risk. The type of person that this is attractive to is the person who understands math.

Case Studies and Real-Life Examples

Here we have a table comparing everything that we’ve looked at so far. We’re just going to talk about the best-case scenario here, the 10% every single year growth, 100% in stocks, and assume that you achieve those 10% returns, and look at if you’re 57 or 62, 3, 5, 7, or 10 years. $26,000 versus $42,000, or $26,000 versus $45,000. Math is pretty clear here. This is what’s in the bush. We could have 26,000, we could have 24. A bad outcome, maybe we have somewhere between $12,000 or up, maybe even less.

In five years, $32,000 versus $49,000 or $32,000 versus $54,000. $38,000, $59,000, $52,000, $78,000. The numbers are pretty clear here. With no stock market risk, a guaranteed growth rate, a guaranteed distribution rate, a guarantee that as long as you live, you won’t outlive that income, and no stock market risk, no bond market risk, no economic risk, no concerns there of what may or may not happen in the overall market. Fully guaranteed by the claims paying ability of the life insurance company.

Couple more tables here. I wanted to add in, based on the 4% rule, what growth rate would you have to achieve in order to generate a similar level of income? Everything we’ve looked at so far, 3, 5, 7, and 10 years, compared to the age 57 example or the age 62 example, you would have to average 28% per year with your stocks if you want to generate the same level of income that you can get without any stock market risk whatsoever. 20%, 17%, 15% per year over 10 years.

It’s even more dramatic in the age 62 example to generate the same level of income from a stock portfolio or a stock and bond portfolio that you can get with no market risk whatsoever. By investing in stocks and bonds over a three-year period, you’d have to average 32% per year over each of the next three years to be able to withdraw 4% and have an income that was equal to what you can get with no market risk. Pretty self-explanatory here, 22%, 18%, 15% per year to generate a similar level of income.

Okay, so we have a basic summary here. How much more income every single year does the fully guaranteed by the claims paying ability of the life insurance company option provide? Age 57, age 62, if we want income in three years, $15,000 more per year. 17,000 more per year if you want to take income in five years, $20,000 and $26,000. Age 62 example, obviously the numbers are a bit bigger.

Now, obviously, mathematically, there’s a whole heck of a lot more income and a whole heck of a lot more certainty with one of these routes versus the other. Now, some of the comments or some of the questions that may come up here are first and foremost, the 4% rule is based on an inflation-adjusted income. Yes, that is correct. The 4% rule says if we withdraw this much and then adjust upwards for inflation, let’s say 2% or 3% annually, you probably won’t run out of money by the time roughly age 90 comes around.

Here’s the thing, I would much rather have $15,000 more per year every single year in my pocket over 10 years. That’s an extra $150,000 of income just looking at the three-year example. Still, even if we did the inflation-adjusted basis of the 4% income and summed up the totals, we would see that you receive a significant amount of more money with the guaranteed income option. Conceptually, because you’re receiving that money now today, it’s far more valuable than the future inflation adjustments.

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The Role of Fixed Indexed Annuities in Retirement Planning

Second thing, this is a fixed indexed annuity with an income rider attached to it. You make your deposit, the pension account or the income account grows at a specified rate. This one is 7% compounded guaranteed, but then it has a very high distribution rate attached to it, so whatever it grows to, we can then distribute a large sum of money and the life insurance company guarantees it every single year for as long as you’re alive.

You make your deposit, if you pass away the next day, the insurance company doesn’t keep your money. It’s not an immediate annuity or the same type of annuity if you have a pension from work. You still have a death benefit here. Now, if you take all of the income out over 30 years and you receive three times what you invested, no, there is no death benefit in that scenario, but you have protections if you make your deposit and you pass away next day, next week, next year, five years, your death benefit is still there.

Yes, annuities do pay commission. If you reach out to us and we have a conversation and we’re able to maybe look at some of your fixed income or whatever it may be to generate more income for you, it’s a win for you, it’s a win for us. Commissions with these types of vehicles, they come directly from the insurance company’s budget. They do not come from your pocket. They do not reduce the amount of money that you invest. They don’t impact the amount of guaranteed lifetime income that you will receive. We as a firm, we do receive a commission. Typically, it’s between 5% to 7% of what your deposit is.

Now, for that 5% to 7%, we help build the plan, we work with you every single year, there are some growth options within the contract that we can help you with, but it’s important to understand that that’s how we get paid. That’s how that commission system works. You win, we win.

I’m recording this video mid-June 2024. These are the rates of the very best guaranteed income contract in the market for a 57 and a 62-year-old. If you reach out to us in 2 weeks, or 5 weeks, or 10 weeks, or a year, rates change. These are not set in stone for someone who reaches out to us in six months. It’s a dynamic environment. There are multiple different carriers, dozens and dozens of carriers competing for your dollars in the retirement income marketplace.

The Impact of Interest Rates on Retirement Income

Some months, one carrier says, “Hey, I want to offer the most guaranteed income.” Other months, another carrier steps up and says, “No, we want to provide the most guaranteed income.” Usually, it lasts for four, five, six months with a carrier. The point is, they’re interest rate sensitive, meaning when interest rates come down, the lifetime income numbers that you see here are likely to decrease as well. They still, even back when interest rates were zero, they were still far superior than the 4% rule based on the guarantees. It’s important to understand that rates and income and all of these things changes on an ongoing basis. It is a dynamic marketplace.

One of the big benefits of taking advantage of this type of strategy for a portion of your retirement assets right now today is you get to lock in these guaranteed income rates and today’s high interest rate environment for your entire retirement. Most experts believe that interest rates will come down over the coming years. When they do, the guaranteed income options on the market will decrease for new purchasers at that time.

Today, when you lock in your rate and you do that by signing an application, that’s your intent to explore more and let the insurance company know, “I’m considering doing this.” That typically locks your rate in for 30 days or maybe 45 days. If you get your money transferred by that point, your rates are secured and you can have today’s high interest rate environment that translates into significantly more income for your retirement secured for the next 20, 30 years.

The ABCs of Fixed Index Annuities

Delve into the factors that determine whether a Fixed Index Annuity
aligns with your individual financial landscape, risk preferences, and
retirement aspirations.

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Planning Techniques for Secure Retirement Income

Okay, so a lot of math and facts in this video, but I want to talk a little bit about planning techniques here. It’s important, I believe, to make this decision with guaranteed income with respect to your Social Security election strategy or the timing around Social Security. Think about it this way. Let’s say we carve off and you have $1 million, let’s say we carve off $300,000 and we build a guaranteed income plan and you’re not really sure when you want to take Social Security.

Maybe because of this and the fact that it will create a step up of guaranteed lifetime income that complements or supplements your Social Security, maybe we take Social Security sooner. We let this grow at the guaranteed compounded rate because it will grow more than Social Security will. Now we have two points in time where we have a natural inflation adjustment, but we have these multiple sources of guaranteed lifetime income that are significant.

What they do is now, once they’re both activated, you create a baseline of income, secure income, but you can never outlive that it does one of two things. One just helps you sleep better at night because you’re not afraid of running out of money. You feel more comfortable spending when you go places, when you do things, when you plan retirement activities. Two, for a lot of our clients, it helps them actually invest a little bit differently in the stock market, specifically more aggressively, because now they have Social Security. They have this guaranteed other source of income. Let’s say it’s $80,000, $90,000, $100,000 a year. They don’t need to touch their investment.

Now, we don’t have to be as conservative if they have that willingness to take that risk and be a little bit more heavily exposed to equities. It gives you that flexibility to decide, “Hey, I don’t need to touch this money because I’ve carved off a certain portion of my asset base, and combined with Social security, I now have more income than I’m going to need for the next 10, 15, 20 years. I can go 100% stock or 70% stock or 50% stock,” whatever would be aggressive to you. A lot of times that can create more wealth over the long haul when you look at it that way.

Now, clearly, you can have more income with the guaranteed income route. The question is, are we carving off some of the fixed income, some of the money in savings, whatever that might be, that’s some of the planning that we need to look at. If you want to explore your options, what rates are today, how much more income you can have, we keep a link in the description. Click on that, and that’s going to lead you to a form fill. Once you fill that out, we’ll be notified immediately. Most likely you’re going to get a call within an hour if it’s on a weekday, and we’ll reach out to you. We’ll set up the conversation, and we’ll go from there.

Annuities are a Supplement, not a Replacement

I could go on and on here about different points and some of the planning techniques, but really the last thing I want to communicate is that a guaranteed lifetime income strategy like this, it’s not an either or when compared to stocks, or bonds, or guaranteed lifetime income. This is not a replacement for stocks. It’s not a replacement for long-term capital appreciation.

This is a supplement to your stock portfolio, a supplement to Social Security. It can be considered a fixed income alternative or a replacement for your bonds because, as I previously stated, once you lock in your guaranteed income rates today, you have now locked in today’s higher interest rate environment for the duration of your retirement. Whereas in the fixed-income marketplace in bonds, if interest rates go down, the yields on your bonds are going to decrease as well over the coming years. In three years, five years, and seven years, this is what we call interest rate risk, you’re going to be earning an interest rate based on whatever that rate is in the future. Many people believe it’s going to be much lower.

It doesn’t even have to be a replacement for your fixed income. That is where we would look to carve off some portion of the overall portfolio to dedicate something like this. To get a little bit advanced from a portfolio management standpoint, what we’re doing is creating a barbell in the fixed-income portion of your portfolio. You’d have some short-term, hopefully, fixed income because that’s the less risky part. It’s actually paying higher interest rates today because the yield curve is inverted. Then now this guaranteed lifetime income portion is the other end of the barbell. This is where we’re capturing today’s interest rate environment and extending the duration out and helping to get you more income over your entire retirement.

Not a replacement for stocks, designed to supplement your stock portfolio, designed to supplement your Social Security income, maybe your pension. This is all about generating income, the maximum amount of income with the least amount of risk. I want to be quite frank. When you look at this, I’ve lost some people in this video now once I said guaranteed lifetime income or brought up the word annuity. The truth is, this is designed for people who understand math. The math is quite clear. If you make 10% a year, put it at risk, and I want income in three years, you’re telling me even if I do that, I’ll still be $15,000 short of what I could have on a guaranteed basis. This is simple math.

It’s also for someone who is a little bit more conservative. You don’t want to take a ton of risk, but you don’t want to have the next 20 years of your retirement averaging 2% or 3% maybe on your low-risk CDs or bonds. It’s an additional tool that can be added into the portfolio mix. You still want to stay broadly diversified across different asset classes, own some stocks, own some bonds, some real estate.

What we’re doing is we’re layering in multiple sources of guaranteed lifetime income to hopefully create a stable source or stable stream of income that you’ll never outlive no matter how long you or your spouse, what your life expectancy is. Hopefully, it helps you spend a little bit more freely, enjoy retirement a bit better, and not worry so much about what the stock market is doing.

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