Stop Comparing Annuity Payout Rates to the 4% Rule
January 18, 2023 by David Blanchett
The rise in interest rates has led to an increase in LinkedIn posts (at least, that I’m seeing) where some individual is effectively asking why someone would settle for 4% when they can get 6% (or more!) with a (nominal) annuity, or some variation thereof.
Wink’s Note: You know how William Bengen developed the 4% Rule?
Well, I was ignorant of the fact that some financial advisors are comparing that 4% rule to income annuity payout rates.
This is absolutely disingenuous.
David Blanchett of PGIM points-out:
“The 4% rule is based on a real spending assumption (where withdrawals increase with inflation) while the majority of annuity payouts are nominal (constant over time). Additionally, income annuities provide benefits for life, whereas the 4% rule assumed a fixed retirement period (i.e., 30 years).”
Duly noted, Mr. Blanchett. Duly noted. -sjm