Decumulation: There Is No Rule of Thumb
By Rich Rausser, CPC, QPA, QKA, Senior Vice President, Pentegra Retirement Services
In most pursuits, people usually look for a “rule of thumb” when it comes to sound strategies or best practices. However, when it comes to developing a retirement plan strategy the rule of thumb is that there is no rule of thumb.
The reason for this may be obvious. As individuals, we all have our own needs, wants and concerns; many of us may be the same age, live in the same geographical area, and even make the same exact salary. Even if two people were hired on the same day by the same firm at the same salary, and made equal contributions to their 401(k) plans throughout their careers, there are still a number of variables to prevent them from taking a “one size fits all” approach to decumulation.
Are both persons married? Are their spouses/partners both working and, if so, what are their salaries and retirement savings? Do they have any children? Where are they in terms of college expenses and healthcare needs?
I note this because there has been some discussion of late over an industry-wide “rule of thumb” that suggests retirees should try to replace 80 percent of their income during the first year of retirement. While that may be an admirable goal, it may not be realistic for many retirees for the reasons listed above as well as others.
Another specious rule of thumb is that retirees will simply take their 401(k) savings as a lump sum distribution when they retire. While lump sum distributions are certainly a viable option, many plan participants may not even be aware that other options exist and may benefit from further education about alternative distribution options.
Alternative Distribution Options
Many 401(k) plans have numerous distribution options, thus offering a tremendous amount of flexibility in how retirees can take their money. These can include what we call an “ad hoc distribution” – whereby the retiree takes out some money whenever he or she wants; a regular, periodic distribution -- $2,000 per month, for instance, or $6,000 per quarter; or structuring payouts over the retiree’s life expectancy.
There is another option that I have mentioned before: supplementing one’s retirement income by purchasing an out-of-plan annuity that can provide a guaranteed level of income to retirees for as long as they live. If a retiree puts 20 to 25 percent of their retirement savings into an annuity, with Social Security providing supplemental income and the rest of the retiree’s account balance consisting of various other pieces, the retiree is in effect “pensionizing” part of their retirement savings.
The annuity option should be available to every 401(k) plan participant, regardless of individual circumstances; it should be viewed as another tool in their retirement savings tool box.
Retirement plans should be constructed in a way that provides the best possible solutions to its plan participants in a cost-effective manner.
For additional information, watch the recent webinar, “Keys to Building Successful Retirement Outcomes.” Or, download The Pentegra Distribution Path™ for an overview of all the options available to employees and essential tips for creating a decumulation strategy to build a lifetime income stream.
Pentegra is the NAFCU Services Preferred partner for Qualified Retirement Plans for Credit Union Employees. More educational resources and contact information are available at www.nafcu.org/pentegra