3 Big Retirement Withdrawal Mistakes
So what are the three big retirement withdrawal mistakes? Let's go through them quickly, and then I'm going to dig in, but I know you're saying, "Stan, give me the answer, give me the answer right now."
The 4% Rule
The first one is the 4% rule. I've been around forever. I used to work for a company named Dean Witter. All you old people are like, "I remember them." That's how old I am. In the volatile market, we're in, I know I will get all kinds of emails from you, masters of the universe who manage money, saying, "I can do the 4%." Sure you can. Sure you can. It's not guaranteed. The 4% rule is not guaranteed. And if you have up and down years and volatility in the markets, and I understand that a lot of the advisors out there right now at the time of this taping have never seen a down market. Spoiler alert, sparky advisor. You're getting ready to see one sometime soon because that's how it works.
Over 85% of all trades somewhere, but in that range are non-human, computer, high velocity, black box traded. It's going to be interesting the next downturn. I don't think it works in the volatile markets that we're in. I wouldn't bank on it. I would have some contractual guarantees underlining your portfolio in non-annuities. The contractual guarantees are the annuities that do away with the 4% rule put in the income floor using annuity lifetime income guarantees for that 4% for the income you need.
The 59.5 Rule
The second one is the 59 and a half rule. And the 59 and a half rule is taking money out of, say, qualified accounts; you know the 401(k)s or the IRAs. "I'm going to retire when I'm 50. I'm going to retire." Easy there, Sparky. Because if you take money out of an IRA without a just boom, "Just send me money." You're going to get penalized. The 59 and a half rule IRS says, "Hello, you can't take money out that's been tax-deferred during all that period until you're past age 59 and a half. That's the second biggest withdrawal mistake.
The third biggest one, because we've done all, the 4% rule and then the 59 and a half age rule. But the one that I see right now is scary, and it happens every single time in raging bull markets where people think the market's going to go up and up and up and up and never going to go down. People make money from contractual guarantees like principal-protected products like a Multi-Year Guaranteed Annuity. They are cashing those in because they want to get stock market returns.
The other day, a friend called me and said, "Hey Stan, can we meet with my son and me?" And I've known the song since he was in diapers pooping on himself. Now he is in college, and he wants to drop out of college and become a day trader. That's when I know the markets are at the top when idiot stuff like that is happening. So I'm seeing that the third biggest mistake is that people are taking money out of perfectly good contractual guarantees, and they're going to chase the market. "I will be Gordon Gekko, master the universe 20% returns. I'm going to buy Bitcoin. I'm going to buy all that stuff up." Don't do that. Please don't do that. Those are the three biggest mistakes, but the ones happening repeatedly are people cashing out, MYGAs, fixed-rate annuities, and going and being Johnny Stock Market. It doesn't work like that.
So those are the three biggest mistakes, but there are more. Hang in there. So I got a call; this gentleman had purchased income riders from me attached to indexed annuities. And that's kind of how we use indexed annuities as a very efficient and cost-effective way to deliver the income rider guarantees for future income. But to kind of get down into the details. When you buy an indexed annuity and move it to the income rider, the income rider is a guarantee, it is contractual, it is a lifetime income transfer risk, but that amount is monopoly money in a phantom account that you can't cash in, you can't transfer, et cetera.
So in this person's case, he wanted to cash in one of those big indexed annuities with income riders; he put $500,000 in an indexed annuity. The rider value was worth like $700,000. Meaning that the $700,000 amount could be used for lifetime income in the future, continuing to grow. It's not static. It continued to grow by a contractual amount that can only be used for a lifetime income. Exactly how it was designed, exactly what he wanted when he bought it about five years ago. But here's what he said. "I feel like I'm just missing an opportunity with the market, Stan. What I want to do is just cash that in. I don't care about the surrender penalties. I just want to take the money. I want to invest in the stock market."
I went, "Hold on there. You understand that 700-plus thousand in the income rider account is not part of when you cash it in. “You will get the accumulation value when you cash in that indexed annuity with the income rider, you will get the accumulation value." So, in essence, you're going to leave, Fred, you're going to leave a couple of $100,000 of benefits on the table when you cash it out. Does that make sense? I said, "Run the math. That's crazy talk."
Eventually, I convinced him, and hopefully, he will stick to what he told me. "Yeah, I think you're right. We'll just stay." But that's the nonsense that happens in a bull market. You don't want to leave those benefits on the table, and many people are doing it. Don't disrupt the contractual guarantees that are already in place because when you try to cash that in, those benefits don't cash in, just the accumulation value does.
So a question I got recently was, "How do I manage my retirement withdrawals?" So looking at the 4% rule where you're pulling off 4% out of your portfolio. My advice to this person was, "Hey, why don't we just buy a Single Premium Immediate Annuity solving for the income that you need?" You're pulling out this 4%, and then you don't have to do the 4% anymore. You can just go manage the money." Spoiler alert, by the way, I've been doing this for decades.
When we put in a contractually guaranteed income floor using annuities, you're transferring the risk for that income to come in uninterrupted and unchanged. Guess what? You become a better investor because you're not disrupting any investments by pulling out 4%. If you think about it logically, that makes sense. Put in the guaranteed income floor using annuities and then take the rest and invest.
So the big question is, what should you not do in retirement? I get this all the time. First of all, let me start this answer by saying that I don't know if I came up with it, but I'm going to take full credit. There are no U-Hauls behind hearses; you can't take it with you, as I tell people. Your strategy should be, "I want my last check to bounce right before I die." Who cares? You can't take it with you. Live your life.
Over the past decades, I have so many clients that have scrimped and saved and timd and put it off, and they're not, we're not going to. Live life now. So what's the biggest? I mean, truly, the biggest mistake I'm seeing is that people are not doing what they had planned to do. And I know that circumstances around us always give us an excuse not to go forward or not to start checking off that box list that we want to do. My encouragement to you is to do it. Now, how do annuities fit into that? It provides that contractually guaranteed income floor that you do not have to worry about; that will hit your bank account regardless of what’s going on in the world.
Who cares? Who cares who's in office? Who cares who wins the game? Who cares? It's all about you. It's all about your family. It's all about your lifestyle. You've worked very hard for it. Enjoy it and never forget there are no U-Hauls behind hearses.
Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.