Savings2Income Planning Method vs. Retirement Drawdown Strategies –What’s Better?

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Third in a series on retirement planning “facts or fiction”, why certain common wisdom approaches fail, what are the alternatives, and why you should be interested.

The Savings2Income (S2I) planning method is designed for average investors approaching or already in retirement, who may need all of their savings to support their lifestyle in retirement. Retirement drawdown strategies are typically used by higher net worth investors who do not have to commit all, or almost all, of their assets to meet their income needs in retirement.

This fundamental difference is very important for these average investors, yet the S2I planning method can still be of interest to higher net worth investors because they can deploy fewer of those assets to create dependable, spendable retirement income, leaving more assets for wealth transfer.

The S2I planning method is more than a distribution/investment strategy for a portion of an investor’s assets; rather it takes into account all of an investor’s retirement savings— 401(k), Rollover and Roth IRA, personal retirement savings (held outside 401(k) or IRAs), annuities, Social Security, etc.—to determine the best way to generate the highest amount of dependable, spendable (after tax) retirement income.

Compared to drawdown strategies, the S2I planning method:

1. Begins before retirement with the right savings strategy; starting a plan at retirement is just too late.

2. Focuses on factors an investor controls - fees and taxes, and the timing and amounts of Guaranteed Income purchased periodically.

3. Resets income periodically to adjust to market conditions and personal circumstances; drawdowns are a withdrawal strategy and are not a planning method.

4. Eliminates the “running out of money” and market risks at a “no worry age” chosen by the investor; drawdown risks are with the investor for life.

Further, our analysis shows that drawdown plans can be expensive and tax inefficient, and saddle investors with residual risk. Specifically, compared to retirement drawdown strategies, the S2I planning method results in:

1. Less income volatility than drawdown methods that pay out a percentage of savings such as Required Minimum Distributions (RMD). For example our analysis shows that in poor market scenarios, there were many more years with reductions in income under the drawdown strategy as compared to the S2I planning method. Under a drawdown strategy which pays out a dollar amount set by formula, the market volatility increases the risk of funds running out during an investor’s lifetime.

2. Higher spendable income from Personal Retirement Savings in both bad and good markets. The combination of lower fees, deferred taxes and purchases of Guaranteed Income virtually assures better income results in all market scenarios. In addition to the spendable income advantage, the S2I planning method provides higher account values throughout most of the investor’s lifetime.

To summarize, the S2I planning method, by integrating cost of living protected lifetime income from Social Security with (i) more stable income from your 401(k) and Rollover IRA savings, and (ii) increased spendable income from Personal Retirement Savings , provides an investor with peace of mind in retirement. By working so efficiently for the investor, even greater savings and wealth transfer can result as well.


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Chris Spring

John Mulqueen
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