However, there are some potential issues with the sustainable withdrawal rates. Most notably, we must make a planning assumption around the retirement time horizon, and although statistical life expectancies can inform this assumption, we cannot say with any certainty how long an individual will live.
The dilemma: Assume a plan of 25-year retirement for Sue.
If Sue ultimately lives only 10 years, a too conservative plan would force her to live a less comfortable lifestyle to preserve assets for the later years, but those were not actually needed. Conversely, if Sue lives for 35 years, the probability that she runs out of money compounds because a sustainable withdrawal rate was based on a shorter timeline.
This dilemma highlights two of the challenges that we must address in retirement income planning: longevity and sequence of returns risk.
Our next blogpost will introduce a solution that combines investment, life insurance, and annuity.