Hi, I’m Marty. I help people plan safe money retirement strategies. Today I want to tell you a story about a couple. They came to me with a lot of money saved. But they had a big problem. And it all comes down to one thing: their withdrawal rate.
What Is a Withdrawal Rate?
A withdrawal rate is just a fancy way of saying: how much money do you take out of your savings each year?
If you have $100 saved, and you take out $4 each year, that is a 4% withdrawal rate. Easy, right?
Most money experts say 4% is a safe number. People have used this rule since the early 1990s. Some experts even say it should be lower, like 2.9%, depending on what is happening in the world.
Now let’s meet the couple.
Meet the Couple
A husband and wife came to see me. The husband was 62. He planned to work two more years. The wife was 60. She had just retired.
Here is what they had:
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- A house that was almost paid off
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- $1 million in traditional IRAs
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- $500,000 in other savings (non-qualified money)
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- A plan to wait until age 67 to start Social Security
Once they hit age 67, Social Security would pay them $3,600 each per month.
They needed $10,000 per month to live on. But after taxes, Medicare, and extra insurance, they really needed about $11,500 per month. That comes out to $138,000 per year.
The Big Problem: Their Withdrawal Rate Was Way Too High
Here is where the trouble started.
They had $1.5 million saved. They needed $138,000 a year. Let’s do the math.
| What They Needed | What They Had | Withdrawal Rate |
|---|---|---|
| $138,000 per year | $1,500,000 saved | 9.2% |
That 9.2% is more than double the safe 4% rate that most experts use.
Even though $1.5 million sounds like a lot of money, this couple was in what I call the danger zone. A high withdrawal rate can make your money run out much faster than you think, even if the amount of money you started with seems big.
What Happens If They Keep Doing What They’re Doing?
The couple wanted to stay safe. They did not want to put their money back in the stock market. They thought they could earn around 4% interest in fixed products and live off of that.
Here is what happened when I ran the numbers:
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- They would run out of money by their mid-80s
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- Only 60% of their income would ever be guaranteed
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- They would have zero extra cash saved up for emergencies or fun things, like helping family or buying something special
This is not a good plan. It just sounds good, until you run the numbers.
What If They Took More Risk Instead?
Next, we looked at a riskier plan. This is what many regular financial planners might suggest. It means putting 80% of the money in stocks and only 20% in safe places.
This plan could go two ways:
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- If the market does really well (like it did starting in 1995), their money could grow a lot. They could even end with three to four times as much money in their late 90s.
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- If the market drops right when they retire (like what happened in the year 2000), they would run out of money even faster than before.
Nobody can predict which one will happen. Even really smart investors cannot always guess the market correctly. So this plan is really just a gamble. And this couple did not want to gamble with their life savings. I do not blame them.
A Better Way: Guaranteed Income
So we looked at a different idea. What if part of their money could create guaranteed income for the rest of their lives, no matter what the stock market does?
Here is what I suggested: take $950,000 of their $1.5 million and put it into an income annuity. This money would come from their IRA. The income would start in two years, when the husband retires.
This would give them $78,000 every year, guaranteed, for both of their lives. That is an 8.2% payout rate.
I know that sounds like a big number to move. But here is the thing to remember: the purpose of the money matters. If the goal is guaranteed income for life, the math says this is the way to do it.
“But Won’t My Money Be Locked Up?”
This is the question people ask me the most. They worry that putting money into an annuity means it is “locked up” forever.
Here is the truth: if your money has to stay invested just to keep paying your bills every year, it is already “locked up”. Meaning, you can look at your account and see a big number. But you cannot actually take out $50,000 to help your kids, or $100,000 for a boat, without messing up your whole income plan.
So moving money to an annuity is not locking up money that was already free. It is actually freeing up money that was already stuck to work more efficiently. I call this “freeing the hostages”. The money goes to work doing one job really well: providing guaranteed lifetime income. And that takes the pressure off everything else.
Comparing All Four Plans Side by Side
Let’s look at all the options together.
| Plan | Guaranteed Income | Runs Out of Money? | Extra Cash Available |
|---|---|---|---|
| Stay the same (4% interest) | 60% | Yes, mid-80s | $0 |
| Go aggressive (80% stocks) | 60% | Maybe, as early as early 80s | $0 |
| Half into annuity | 80%+ | Around age 92 | $0 |
| Full annuity strategy | 90%+ | Never runs out | Over $500,000 |
The Full Plan: What It Actually Looked Like
Here is what happened when we used the full plan, moving $950,000 into the guaranteed annuity:
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- They never ran out of money, even assuming just a modest 4% return on the rest
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- Over 90% of their income was guaranteed for life
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- Their withdrawal rate dropped below 3% and stayed there once Social Security kicked in
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- They kept over half a million dollars available the whole time, even into their 90s
This plan runs on its own. It does not matter what the stock market does.
One More Bonus Nobody Expects
Because the pressure came off their savings, the husband was able to wait until age 70 to start his Social Security. That added an extra $860 per month.
That might not sound huge. But over time, it adds up. And it protects his wife too. If something happens to him first, she loses her own Social Security check, but she gets to keep his bigger one instead. That is on top of the $78,000 per year already coming from the annuity.
The Big Takeaway
This couple had the exact same amount of money the whole time. Nothing changed about how much they saved. What changed was how the money was structured and what job each part of it was given.
They went from a plan that was almost guaranteed to run out of money to one that rarely will.
Ask Yourself This
You do not need $1.5 million for this idea to matter to you. It works whether you have $300,000 or $3 million.
Here is the question to ask yourself: How much of my yearly spending do I want to be guaranteed, no matter what the market does?
Add up your guaranteed income right now. For most people, without Social Security or a pension, that number is very small. Once you know your number, you can decide if some of your savings should be doing the same guaranteed heavy lifting this couple’s did.
The Next Step
If you want to see what your own safe withdrawal rate strategy could look like, book your free Income Clarity Call. There is no cost and no obligation.
Podcast Episode 118: Retirement Withdrawal Rate Danger Zone: A $1.5 Million Case Study
Download Episode 118: Retirement Withdrawal Rate Danger Zone: A $1.5 Million Case Study
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