Capital Group paper lays out 4% to 5.5% withdrawal rates for target-date funds

Capital Group has published a paper arguing that a well-designed target-date series, paired with a deliberate withdrawal framework, can itself serve as a retirement-income solution. The firm frames that approach as a simpler alternative to annuities and other retirement-income products, as PlanAdviser reported on Oct. 21. The paper is titled "From Target-Date Savings to Retirement Income: Frameworks for Withdrawals."

The paper sets out two withdrawal frameworks for the firm's target-date series, both aimed at estimating sustainable spending over a 30-year retirement horizon. Under the fixed strategy, a retiree withdraws 4% to 4.5% of the portfolio at retirement and then increases that dollar amount annually for inflation, which on a $1 million balance means $40,000 to $45,000 in the first year. Under the variable strategy, the retiree takes 5% to 5.5% of the portfolio's value at the time of each withdrawal, so annual income rises or falls with markets.

The work grew out of conversations with plan sponsors examining retirement-income options for participants, according to Kelly Campbell, head of multi-asset solutions at Capital Group. "As we've talked to plan sponsors, we've seen more and more of them reassessing their plan lineup to figure out if they have the right solutions in their lineup for retirees," Campbell said. "Perhaps the most used strategy in your retirement plan, [the target-date fund], is your retirement income solution."

On the same $1 million balance, the 5% to 5.5% variable rate supports $50,000 to $55,000 in year-one income, compared with $40,000 to $45,000 under the fixed rule. Capital Group notes the fixed rule carries the risk of exhausting assets if returns fall short of expectations over an extended period. The variable method is designed to guard against that outcome because spending adjusts automatically to market conditions.

On Oct. 21, this publication reported that Capital Group renamed its 2010 through 2025 target-date funds to include "retirement income," pointing the funds at the spending phase.