Modelling tools overtake 4% rule as favoured method to determine safe drawdown withdrawal rates

Pension advisers are now favouring modelling tools over a fixed rate method as the means to determine ‘safe’ drawdown withdrawal rates, according to research from Aegon.

Aegon found that 38 per cent of advisers now use modelling tools to determine sustainability of retirement income, up from 28 per cent a year previously.

By comparison, 37 per cent of advisers are using a fixed rate method, also known as the 4 per cent rule, down from 41 per cent a year previously.

Those using a fixed rate method have increasingly been using a rate of less than 4 per cent, with 32 per cent doing so compared to 21 per cent a year ago.

Modelling tools, such as cashflow planning and scenario analysis tools, facilitate a “more dynamic approach” to managing retirement income, Aegon stated, with advisers noting that they have become more reliant on these over the past year to illustrate portfolios and analyse scenarios after markets fell at the end of Q1 2020.

Aegon’s research added that a fixed rate method can be inconsistent with cashflow modelling, especially if clients have irregular income needs or during a period of volatility.

Other methods, such as basing income on annuity rates or taking portfolio income, have also declined in popularity, with advisers citing the continuing challenging interest rate environment as the primary reason for this.

“The rate at which you withdraw income in retirement is a crucial consideration and advisers look to strike a balance between meeting clients’ current objectives while ensuring they have enough money to maintain an income throughout their life,” commented Aegon pensions director, Steven Cameron.

“The research highlights that for the first time more advisers are using modelling tools over a fixed rate to determine a ‘safe’ withdrawal rate.
“Historically, it was common to base a fixed rate on the 4 per cent rule of thumb for those with regular income needs, but advisers are increasingly considering whether adhering to this strategy is the best approach, particularly in volatile markets.

“Modelling tools allow for a more dynamic way to manage a sustainable income and will have been heavily relied upon during the market downturn at the onset of the Covid-19 pandemic. Furthermore, where a fixed rate approach is taken, there has been a big increase in advisers using a rate below 4 per cent.”

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