Flexible retirement withdrawal systems, however, do a have a downside that advisors need to consider, Benz said.
While they “may elevate withdrawals over a retiree's lifecycle, they can also lead to undesirable volatility in household cash flows. In short, they may not be very livable,” she added.
In fact, according to Morningstar, “the same withdrawal systems that delivered the highest starting safe withdrawal rates led to higher cash flow volatility on a year-to-year basis during the drawdown period,” Benz reported.
What could go wrong? “A fixed real-dollar method is not inherently problematic if a retiree embarks on retirement in a period of low bond yields and/or high equity valuations. But if these factors also lead to lower market returns, the starting withdrawal amount that is then inflation-adjusted throughout retirement might need to be uncomfortably low,” Benz warned.
“Employing a flexible withdrawal system helps address the above-mentioned sequence of return risk while also allowing for the possibility of higher withdrawals during times when the market environment is more rewarding,” she added.
The level of wealth a client has will also influence how flexible they may be willing to be with withdrawal levels, Benz said.
“A key factor in whether a given withdrawal system is ‘livable’ is a retiree's level of wealth and the extent to which changes in the withdrawal rate might be a small nuisance or begin to have a significant impact on the retiree's quality of life,” Benz said.
Put another way, “it is a good bet (though by no means a certainty) that a 25% reduction in spending would have a bigger negative impact on the quality of life for the retiree who goes to $45,000 from $60,000 than it would for the retiree who needs to drop to $150,000 from $200,000,” Benz warned.
Less income means there is less room to cut discretionary expenses, she added.
Clients who have greater non-portfolio income sources are also likely to be more comfortable with more-flexible withdrawals, Benz said.