May 22, 2017

Sticking to the 4% withdrawal rule for retirement planning as a wealth management strategy may lead to an eventual shortfall of income, Financial Advisor writes.

The rule is outdated — and advisors still using it for financial planning may not be acting in the best interest of their clients, Earl Schultz, founder and president of Strategic Wealth Advisory, tells the publication. When the rule was established in the 1990s, the markets were growing at 12% to 15% annually, a markedly different environment from today, Schultz says. The rule also ignores growing life expectancies around the world, David Blanchett, Morningstar’s head of retirement research, tells Financial Advisor. One parter in a married couple over 65 now has a 40% change of living longer than another 20 years, he says. Furthermore, lifespans correlate greatly with wealth, so financial advisors’ clients are more likely to live even longer than the averages, according to Blanchett, Financial Advisor writes.

Nonetheless, Blanchett suggests that the 4% rule is a good start for a conversation with the client to avoid too much complexity. Advisors can then use a Monte Carlo analysis to fine-tune the financial planning strategy, he tells the publication.

Alternatively, advisors can use the “personal funded ratio,” devised by Russell Hill, chairman and CEO of Halbert Hargrove Global Advisors, and Sam Pittman, a senior researcher at Russell Investments, according to Financial Advisor. That approach plugs a client’s anticipated assets and anticipated expenses and liabilities into an illustrated balance sheet, the publication writes. When the ratio between the two sides is below 1, or 100%, it’s easy for both the advisor and the client to understand that the plan is underfunded, Pittman tells Financial Advisor.

By Alex Padalka

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