Page 27 - Investment Advisor - December 2023

need to enact some of the strategies that present a big opportunity to achieve tax- revocable and some irrevocable. Just
can move their wealth out of their own efficient giving, the likes of which may a few to mention are spousal lifetime
estate — and ensure such strategies are not present itself again in their lifetime. access trusts, irrevocable life insurance
appropriately documented and support- “For those folks in that $15 million- trusts and generation-skipping trusts,
ed from a legal and regulatory standpoint. plus area, they really should be starting among many other options.
As Small explains, married clients to think about what kind of giving they As Small points out, those with
with joint wealth of $10 million or below may want to do now,” he says. “There are charitable intentions also have a lot of
face a lot less uncertainty than those a lot of different tools they can lean on.” options, from charitable remainder uni-
with wealth of $15 million and above. If the intention is to maintain the trusts to charitable lead annuity trusts
For couples (or individuals) with this wealth within the family, there are many and charitable gift annuities. All of these
degree of wealth, the next two years different types of trusts to lean on, some are growing in popularity.

rethinking the 4% rule also the fact that we are seeing longevity
increasing over the data baked into the
Advising clients on the best al rule is perhaps the most 4% withdrawal rule, and that is especial-
ways to build and maintain famous example of what is ly true for the top 10% of income earners
the right income stream for called a “fixed withdrawal here in the U.S.,” he warned.
their retirement involves rule.” “In other words, you “We have seen six additional years
both a growing list of invest- have a portfolio and at the of longevity for men in just the last two
ment options and the recon- moment you retire, you calcu- decades. That’s an amazing improve-
sideration of some long-held industry late a fixed withdrawal amount based on ment in longevity, but it also means
assumptions. Michael Finke, a pro- this percentage,” he said. So, on a $1 mil- some of the standards that went into the
fessor of wealth management for The lion portfolio, a client could expect to safe- 4% withdrawal rule research no longer
American College of Financial Services ly withdraw $40,000 per year, adjusted hold today,” Finke added.
and its Frank M. Engle Distinguished for inflation, and never run out of money. As he points out, for a healthy couple
Chair in Economic Security, says helping “This is all based on an analysis that retiring at 65 today, some 50% of them
retirees determine what level of spend- showed that, if you look at historical will see at least one spouse live beyond
ing in retirement is “safe” has become returns in the United States over the 95 — the maximum age considered in
a red-hot topic in the evolving world of long term for a balanced portfolio, you the original 4% rule research.
wealth management. should reliably be able to spend this Finke also highlights the “arbitrariness”
Finke makes that case in a recent much without depleting the portfolio in and “big exposure” to sequence of returns
ThinkAdvisor podcast and credits the a 30-year retirement,” Finke explained. risk. “The real degree of safety with the
rethinking of the long-favored 4% with- That original paper backing the 4% rule depends a lot on when you retire and
drawal rule to a variety of interrelat- rule was written in the early 1990s, whether you get unlucky or not,” he said.
ed causes — some demographic, some Finke points out, and since that time, An advisor can have two client couples
regarding product innovations and oth- there have been some big changes in the who have made the same preparations for
ers involving research and significant marketplace that make this 4% rule “no retirement, but if one couple had retired
changes in the advisory profession itself. longer the standard of a safe withdrawal on Jan. 1, 2022, and ran that 4% analy-
As Finke emphasizes, advisors are being rate that it used to be.” sis, they would face a very different out-
called upon to help clients protect their “This is something we addressed look relative to the second couple who
retirement income given the risk that they [almost 10 years ago] in the research that had waited until June 1, 2022, to retire,
might outlive their savings and could expe- I did with David Blanchett and Wade Finke notes. Making the 4% projection
rience negative portfolio returns late in Pfau,” he noted. “We point out that, in a in January would have suggested a safe
their working lives or early in retirement. lower-return environment like the one spending level of $40,000 per year, he
Ultimately, Finke warns, advisors who it is reasonable to expect we may be in says, whereas the same analysis run in
fail to provide adequate answers to these for the coming decades, that is no longer June would give a “safe” figure of $32,000.
questions — and who fail to contextual- necessarily a safe withdrawal rate.” “If you think about it, this doesn’t make
ize income planning with discussions Simply put, the United States enjoyed any sense, because that second couple
about investment management, tax miti- a strong period for returns in the 20th actually has more money relative to the
gation and legacy planning — will surely century that was used as the basis for first couple, because the first couple
find their practices losing ground. that research, Finke says, and it may no would have been spending out of the port-
As Finke notes, the 4% safe withdraw- longer be valid going forward. “There’s folio even as it fell with the market,” Finke

December 2023 Investment AdvIsor 25