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  • Writer's pictureDavid H. Kinder, RFC®, ChFC®, CLU®

Safe Withdrawal Rate and Level vs Increasing Income Considerations

Updated: Mar 11, 2023




I had a good meeting the other day and it sparked up a question that I hadn't written about before.


First, the premise: The safe withdrawal rate studies (and there are many with varying distribution rates recommended based on when they were conducted) were based on a given amount of retirement income against their retirement portfolios that increased by an inflation factor each year. However, by comparison, when we show life insurance (and annuity) cash flow, they are LEVEL amounts, not increasing. It was questioned that we aren't comparing "apples to apples". Fair enough. So let's talk about it.

The shortest and quickest answer is this: We beat the safe withdrawal rates up front and keep that amount level throughout your retirement. Then, we simply need to know when the 'break even' point is and that's when the initially lower, but increasing cash flow will 'beat' the level payout strategy.

Regarding a life insurance wealth contract: I've been in the industry long enough to use many different company's illustration systems. I have not yet seen a life insurance illustration that will show retirement loans (cash flow) increasing every year. Why not? I don't know. Life insurance is simply a contract that holds wealth. We can use it in many different ways, but illustrating cash flows from the contract, we just show level amounts.


Yes, it can be done and shown with an initially reduced amount then increasing every year. It is a tedious process, but yes, it can be done.


How would it look with an annuity contract?


For this example, this is based on $1 million being put into a given contract with a 25% 'bonus' for income purposes. (That means that you cannot walk away with that 'bonus' as a lump sum. It is only for enhancing the distribution calculation.) There are three payout options available:

  • Non-Guaranteed Level Annual Lifetime Income Withdrawal:

    • $65,000 per year level

  • Non-Guaranteed Earnings-Indexed Annual Lifetime Income Withdrawal:

    • $51,250 increasing

  • Non-Guaranteed Inflation Adjusted 3.00% Annual Lifetime Income Withdrawal:

    • $45,500 increasing

(If we look at that non-guaranteed level distribution... $65,000 from a $1 million original contribution... is really a 6.5% guaranteed level of income for LIFE! 6.5% is much higher than the 4% figure that's most often talked about, and certainly higher than the more common 2.8% recommended by Morningstar with Finke, Pfau, and Blanchett in 2013.)

Which one wins... depends on how long you live. Yes, the cumulative amounts are there at the bottom. Yes, the earnings-indexed and inflation adjusted 3.00% will win out... as long as you live to the illustrated age of 94 and longer.


Let's suppose that you only live to age 75. Which of these wins then?

  • Level (Total): $650,000

    • Contractually guaranteed

  • Earnings-Indexed (Total): $680,873

    • Based on back-tested contract performance of underlying index allocation

  • Non-Guaranteed Inflation Adjusted 3.00% (Total): $521,606

The inflation-adjusted option paid out far less than the level payout.

Why? Because it started out with a far lower initial amount.


Note: I normally don't reference the earnings-indexed option because I don't want to rely too much on the index performance to guarantee a given amount of income.


Of course, by looking at that table, we can see that the annual amount exceeds the level payout at age 78. It took 13 years for the annual payout of the increasing option to exceed the level option. It will take even more time to have the increasing option totals beat out the level payout option.


Now, here's the part that the math doesn't talk about: The phases of retirement.


My friend, author, economist, and PBS presenter Tom Hegna explains as "Go go, Slow go, and No go".


Now, let me ask a rather obvious question to me: Would you rather MORE income in your "go go" years?

Or LESS income in your "go go" years?


I want my clients to have wonderful "go go" years so that when you get to your "slow go" and "no go" years, you have plenty of memories to look back on.


So that has more to do with the lifestyle phase of retirement than just the numbers. I hope this blog article is helpful for those who want to go a bit deeper in looking at making quality retirement income planning decisions.

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