The low-rate environment shows no signs of changing anytime soon, a trend that should prompt financial planners to rethink how they help clients calculate retirement distributions, according to two professors of financial planning.
Michael Finke, a professor at Texas Tech University, and Wade Pfau from The American College discussed the outdated precept of a 4 % annual withdrawal rate from retirement savings. The two appeared in Dallas at a financial planning conference, sponsored by Bob Veres Insiders Forum.
That 4% conventional wisdom has become obsolete due to rising life expectancies, among other things, Finke told the audience of financial planners. And thats especially true for people who use advisors, he said. Your clients are going to live longer than the average American, he warned because individuals who rely on financial planners have higher incomes generally and therefore longer life expectancies.
Another factor that casts serious doubt on the 4% rule-of-thumb is the higher-than-historical P/E ratios. A factor in those higher P/E ratios is the worldwide increased appetite for assets, as savings rates have increased faster worldwide than in the United States. The U.S. is only a third of the capital market. Finke told the crowd. The ultimate fear is that withdrawals that are unrealistically high for the new reality will exhaust a clients retirement funds before the standard 30-plan is complete.
The U.S. markets past performance offers little insight about the future. Rather, Finke says, financial planners should just assume: We got lucky in the 20th century. For many clients, who plan to retire in the next decade, planners should counsel them to adjust to lower returns. And even if returns rise after that, the consequence of those earlier lower returns will still have a negative impact on their ultimate withdrawals. It just doesnt look very good for the 4 % rule, Finke says.
Pfau recommends advisors no longer think statically about retirement withdrawals and rather plan on constant dynamic adjustments to investments and planned withdrawals. Clients may have to consider when they would prefer to reduce their spending, now or later. You cannot have constant spending amounts from a volatile portfolio, The American College professor says.
Pfau did offer his audience one piece of good news based on historical statistics. Financial planners, according to calculations Pfau showed, have on average increased clients portfolio 29 cents on the dollar, as compared to their counterparts who receive no such guidance.