On the impact of low interest rates on common withdrawal rules in old age

Abstract

Ensuring a desired standard of living in retirement has been strongly challenged by increasing life expectancy, and simultaneously by the current and possibly long-lasting low interest environment. In contrast to literature in this field which claims annuitization of wealth being a vital part of retirement planning, many people manage their retirement savings and withdrawal policy during the retirement period independently. To this end, several easily applicable self-managed withdrawal rules are commonly recommended by financial advisors. We cast doubt on the viability of these self-managed withdrawal rules, particularly in an environment with increasing life expectancies and low interest rates. Further, we show that a mixed rule which combines the fixed percentage and the remaining lifetime rule can significantly improve retirees' welfare in an expected utility framework compared to other simple self-managed withdrawal rules. The results provide important insights for revising common recommendations by financial advisors, designing retirement products, and regulation.