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Comparing Annuities and the 4% Rule: Finding the Right Retirement Income Strategy

Annuities and the 4% rule are two popular options for managing and preserving wealth during retirement. However, they operate in very different ways and may be more or less suitable for individuals, depending on their financial goals and circumstances. When deciding between annuities and the “4% rule,” consider your financial situation, risk tolerance, and long-term financial goals. For some, the guaranteed income by annuities may be worth the trade-off of reduced liquidity and potentially higher fees. Others may prefer the flexibility and potential for higher returns offered by the 4% rule and a diversified portfolio of stocks and bonds. As individuals approach retirement, they often seek predictable income and protection against various risks, including the risk of outliving their savings, investment performance, and the risk that the order of returns on their investments may negatively impact their retirement income. Financial experts frequently advise using the 4% rule to manage the risks involved with retirement. According to this plan, 4% of the retirement portfolio will be taken out in the first year of retirement, with successive withdrawals being adjusted for inflation and a minimum of 50% of the portfolio remaining invested in stocks. This plan will offer an estimated 30 years of retirement income. The 4% rule has historically been beneficial in terms of the risks, but recent economic changes and other circumstances have prompted some experts to reconsider. In addition, they are thinking about using annuities as a different risk management strategy. Financial instruments known as annuities offer a guaranteed source of income in return for an initial payment or a series of payments. According to David Lau, CEO of DPL Financial Partners, a provider of low-cost, commission-free annuities, annuities can be a more efficient and cost-effective alternative to bonds in providing retirement income. For example, funding $50,000 in retirement income for 30 years may require $1.2 million in fixed-income investments at a 3% interest rate, while the same goal could potentially be achieved with an annuity for $750,000 or $700,000. In addition, the 4% rule does not consider the specific risk tolerance, which can be important in determining the appropriate retirement income strategy. This year has been challenging for many investors, with inflation reaching 6% or 7%, balanced portfolios declining by 20%, and real returns falling by 25%. The panelists at the “4% Rule Reimagined” roundtable discussion acknowledged that these challenges have made it more significant than ever for investors to access reliable and effective income strategies. However, they also noted that many financial advisors and their clients continue to harbor biases against annuities, viewing them as expensive, complex, and unreliable. One panelist, Shannon Stone, shared an experience where a client became excited about an income strategy that would provide income for him and his wife, and then for his wife after his death, but became resistant when he learned that the strategy involved an annuity. He said, “I’m not giving my money to an insurance company.” This sentiment is common among those opposed to annuities, but the panelists argued that many of the objections to annuities are based on outdated views and a lack of understanding about how modern annuities work. According to David Lau, the CEO of DPL Financial Partners, many objections to annuities are the result of commission-related conflicts of interest, which may be resolved through commission-free annuity platforms. Additionally, he said that insurance firms, which oversee the assets used to fund annuities, are among the best at overseeing fixed-income portfolios and avoiding market timing. According to PGIM’s managing director and head of retirement research, David Blanchett, some mutual funds and annuity products may not be equally as excellent as others. In addition, he mentioned that some financial advisers have hundreds of clients but have not suggested even one annuity.
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Mark, a lifelong Tulsan graduated from Westminster College, Fulton, Missouri with a Bachelor of Arts in Accounting. Mark served in the United States Army as a Captain in the 486th Civil Affairs BN. Broken Arrow, Oklahoma and retired in 1996. Mark is married to his high school sweetheart Jenny and has four beautiful children. Mark’s passion for his work, which includes over 20 years in the Financial Industry started as an Oklahoma State Bank Examiner. Mark examined banks throughout Oklahoma gaining a vast knowledge and experience on bank investments, small business and family investments. Mark’s experiences include being formally trained by UBS Wealth Management, a global investment firm where he served as a Financial Consultant specializing in Wealth Management for individuals & families. Mark is a licensed Series 24 and 28 General Securities Principal and an Introducing Broker Dealer Financial Operations Principal. Additionally, Mark is a Series 7 and 66 stockbroker and Investment Advisor focusing on market driven investments for individuals, businesses and their families. Mark specializes in providing financial knowledge, ideas, and solutions for federal employees, individuals, families and businesses. We serve as your advocate, and assist you in the design and implementation of financial strategies while providing the ideas to maximize your security and wealth. Our goal is to give you maximum control of your financial future. We provide the expertise to help you with personal issues such as: practical tax Ideas, risk management, investment solutions, and estate preservation. Additionally, we’ve counseled hundreds of employees on their transitions from careers in federal government, and private industry to their next life stage, whether that is retirement or a second career. We specialize in devising strategies that roll your TSP, 401(k), pension plan, to a suitable IRA to meet your objectives.

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