What’s Your Distribution Rate When It Really Matters?


What’s Your Distribution Rate When It Really Matters?

Let’s face it. Many of us have short attention spans. Whether it’s looking at our phones or tablets, quickly changing conversations with multiple people, or simply not being able to focus on a task, technology and social pressures have changed the way we interact with people and weakened our ability to pay attention for long periods of time. 

I feel we tend to keep a shorter vision on retirement planning as well. And, this could be dangerous for our clients.  

We talk a lot about life expectancies increasing and determining the proper payout for a client’s assets. Unfortunately, I see many people making plans based upon life expectancies of newborns. We need to concentrate and look at the expanding life expectancies of 65-year-olds and the complications that those extra years bring. 

Rising income needs due to inflationary pressures are greatest in retirement because of health care and housing issues. Longer retirements cannot withstand level income for long periods of time, especially with a volatile base of assets. As planners, we need to consider the impacts of our clients’  income sources in 20 years, not just in that initial five- to 10-year period. 

Over the years, the 4 percent distribution rule has been kicked around by many industry professionals and academics. Again, I don’t think the distribution percentage at age 65 is as important as what the percentage will be in 15 years. Too often, we set a withdrawal rate based upon today’s factors. And, we don’t mitigate the other risks in retirement. Eventually, due to inflation primarily, the withdrawals must invade principal. This starts a downward spiral of asset depletion, resulting in the client running out of money. 

We have to challenge our thinking about income distribution and asset accumulation so that both counterbalance one another. Today, we use one to fund the other. But, they need to complement each other throughout a client’s lifetime.  

If you’re using a simple withdrawal strategy for income, chances are the withdrawal rate will escalate in the client’s late 70s and 80s. This adds pressure to the remaining portfolio and might eliminate options. Instead, think about designing a guaranteed, inflation-adjusted floor of income and creating liquidity with funds that don't supply income. At the same, complement the plan with risk mitigation products to increase the probability for success.  

Bottom Line: You’ve heard the saying “It’s not what you earn; it’s what you keep that matters.” Well, it’s not the distribution rate when you start that matters; it’s the rate in the second half of retirement that makes retirement sustainable.  

Mike McGlothlin is the Executive Vice President of Annuities at Ash Brokerage. His strength is helping advisors become more efficient and effective in their businesses. He and his team provide income-planning solutions focused on longevity and tax efficiency, and they also assist advisors with entering defined-benefit termination planning and structured settlement markets.