There are just a couple of things almost all clients need when they hit retirement—predictable income and protection against a cluster of risks, including longevity risk, performance risk and sequence-of-returns risk.

Historically, many advisors have serviced their retiring clients with the “4% rule,” where annual withdrawals start at 4% of the entire portfolio and increase with inflation, and the balance of the portfolio remains at least 50% invested in equities. This would give a client about 30 years of retirement income, which in many cases is more than enough.

But changes to some of the underlying assumptions of the 4% rule have some advisors taking a second look and noticing that not all of those retirement risks are being cut down to the extent thought. At the same time, they’re also taking a second look at a product that dampens those risks very well, but historically has faced an uphill battle in the RIA community: annuities.

“Retirement planning is now a 30- to 35-year endeavor rather than a 15- to 25-year endeavor, in an environment without a pension and with historically low interest rates,” said David Lau, founder and CEO of DPL Financial Partners, a provider of low-cost, commission-free annuities based in Louisville, Ky. “Even with rates rising, they’re still below historic norms, which makes it a real challenge to deliver retirement income when a client or an individual needs to self-fund for 30, 35 years.”

Lau made the comments at roundtable discussion this week called “The 4% Rule Reimagined.”

A modern annuity strategy, when used properly, can make up for some of the shortcomings the 4% rule faces in the current economic environment, Lau said, not least of which is that an annuity can be a much more efficient—and therefore less expensive—alternative to bonds.

“If you’re looking to fund $50,000 in retirement for 30 years, it might take $1.2 million in fixed income at a 3% interest rate. If you look to do it with an annuity, we can probably do that for $750,000 or $700,000, somewhere in that range,” he said. “You’re meeting that income need much more efficiently through the annuity, giving you more assets to potentially be allocated to equities or wherever you want to invest them.”

In addition, Lau said, the 4% rule does not reflect a client’s risk tolerance, which is easily scored in the accumulation phase of a client’s investment life, but not so easily identified in the unwinding phase.

“‘How do you feel about reducing your income?’ is a whole different question from ‘How would you feel if the market goes down?’” he pointed out.

Joining Lau in the discussion earlier this week were David Blanchett, managing director and head of retirement research for defined contribution solutions at PGIM, which is Prudential Financial’s global investment management arm, and Shannon Stone, a CFP and lead wealth advisor at Griffin Black in Redwood City, Calif.

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