WSJ: Conventional Retirement Wisdom Makes Way for Reverse Mortgages

Conventional wisdom on drawing down retirement savings may be called into question over the course of the next five years, according to the creator of the 4% rule for retirement withdrawals. The volatile markets, he says, may lead retirees to look to reverse mortgages and annuities as traditional saving becomes less viable.

A Wall Street Journal column this week outlined the potential changes, calling into question a tried-and-true method retirement planner Bill Bengen has used for nearly two decades.

In 1994, Bengen published a study showing that if retirees withdraw 4% of their retirement savings in the first year of retirement then increase the amount by the inflation rate each year, their savings will last 30 years, WSJ writes, noting Bengen’s assumptions. The recommendation was changed later to a 4.5% baseline, adjusting for volatile markets.

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WSJ writes:

“…[Bengen] says the next five years could be crucial, particularly for individuals who retired in 2000 and have experienced two major stock-market downturns since then. He expects stock returns to be low for a while; if that is coupled with high inflation rates, ‘then retirees have a big problem,’ he says.

…One option is to put 10% of their savings into an immediate annuity now, to guarantee an income stream for life, and consider buying another annuity in a couple of years. “You don’t have to go whole hog,” he says, addressing the concern of some retirees that annuitizing all their savings would leave no money for their heirs. If the markets zoom up in the next couple of years, the second annuity might not be needed, he says.

Alternatively, he says, retirees can look at taking a reverse mortgage, which basically converts a portion of the equity in their home into cash. ‘Both tools do very similar jobs—they just give you extra cash’ to augment investment income, says Mr. Bengen.

Read the Wall Street Journal article.

Written by Elizabeth Ecker

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  • What a difference time makes.  When will this change in attitude be reflected in industry endorsement numbers?  If they do not help us there, kind words are nice but do not put food on the table. 

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