This Month Only! >> $20 off and a FREE SHRM tote with your membership and code TOTE2018!
Sign up for free email newsletters and get more SHRM content delivered to your inbox.
Is your employee handbook keeping up with the changing world of work? With SHRM's Employee Handbook Builder get peace of mind that your handbook is up-to-date.
Build competencies, establish credibility and advance your career—while earning PDCs—at SHRM Seminars in 12 cities across the U.S. this spring.
#SHRM18 will expand your perspective – on your organization, on your career, and on the way you approach HR. Join us in Chicago June 17-20, 2018
View retirement plan account balances as a source of monthly income, not as personal wealth
Creating an adequate amount of income for employees to live comfortably in retirement will require a combination of income-producing strategies as well as knowing what constitutes realistic and “safe” withdrawal rates from retirement plans, according to an issue brief by the Institutional Retirement Income Council (IRIC), a nonprofit think tank for the institutional retirement industry.
The issue brief, The Problem with Spending Too Fast: Retirement Savings Withdrawal Rates, focuses on strategies to produce a withdrawal rate for individuals who participate in their employer’s 401(k) or 403(b) retirement plan. A “safe” withdrawal rate is defined as one that provides a high degree of probability of lasting for the participant's lifetime.
“Many retirees believe they can withdraw 10 percent or more of their retirement savings each year and still have enough money to last their lifetime,” said Fred Reish, an IRIC member and partner at Drinker Biddle & Reath LLP who co-authored the issue brief. “However, given the statistical chance that at least one spouse in a married couple age 65 will live another 30 years, ‘safe’ withdrawal rates are much less than most retirement plan participants think. In fact, anything greater than 6 percent results in a significant risk of exhausting retirement funds while the individual is still alive. This will be shocking to many participants.
“The issue of a safe withdrawal rate is critical for retirees," Reish added. "The faster that money is withdrawn from retirement savings, the greater the likelihood that the funds won’t last a lifetime. Plan participants need to understand that their account balance is not wealth but a source of monthly income and that funds must be withdrawn on a disciplined basis in order to last.”
Variety of Strategies
The issue brief looks at three possible strategies:
• Withdrawing funds at a 4 percent rate in the first year of retirement, followed by inflation-adjusted withdrawal rates in later years.• Using all or part of the lump sum retirement savings to purchase an annuity for the retiree’s life, for the joint lives of the retiree and spouse, or with a feature that guarantees payments for life with a specific minimum period.• Purchasing a guaranteed minimum withdrawal benefit that permits a retiree to maintain some control of the retirement funds but provides a limited guaranteed benefit.
• Withdrawing funds at a 4 percent rate in the first year of retirement, followed by inflation-adjusted withdrawal rates in later years.
• Using all or part of the lump sum retirement savings to purchase an annuity for the retiree’s life, for the joint lives of the retiree and spouse, or with a feature that guarantees payments for life with a specific minimum period.
• Purchasing a guaranteed minimum withdrawal benefit that permits a retiree to maintain some control of the retirement funds but provides a limited guaranteed benefit.
“It is likely that no single strategy will cover a given retiree’s needs or desires for retirement income. With baby boomer retirements now beginning, we believe that a variety of strategies will be used by individuals, and it seems likely that, for many retirees, a combination of these approaches will produce the best outcome,” said Reish.
You have successfully saved this page as a bookmark.
Please confirm that you want to proceed with deleting bookmark.
You have successfully removed bookmark.
Please log in as a SHRM member before saving bookmarks.
Please sign in as a SHRM member before saving bookmarks.
Please purchase a SHRM membership before saving bookmarks.
An error has occurred
Recommended for you
HR Education in a City Near You
SHRM’s HR Vendor Directory contains over 10,000 companies