New Ways to Evaluate the Retirement Risk/Return Trade-Off - May 2022

warren and derek good morning good morning everyone we will get started in a few minutes

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just getting folks in here now

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let me see if i can

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there we go

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hey guys morning justin okay the audio video working correctly today

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folks are joining in so we'll give him another minute or so and kick things off

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okay

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a few more

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okay we'll kick it off good morning everyone

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good morning daniel i i have to give props to my wife for all for all the decor in the back she's

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she's the one who found the pieces but i appreciate it uh yeah good morning everyone welcome to our webinar this

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morning uh we are excited to bring justin and derek uh for another great topic uh and this is one another one of

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our ce webinars so we're excited for all the folks who came to get in our cfpce credit um just some housekeeping items

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we'll the first half of the webinar will be our presentation and then the second half will be our q a you will see a q

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and a section in the zoom uh toolbar here please drop all your questions

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there you can also view other folks questions vote uh upvote questions to move them up in our queue and then we

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will walk through the questions uh after the end of the presentations as well um

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afterwards you'll get a survey so you can um fill out your first name last name your cfpid so that way afterwards

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we can make sure you get credit um for your cfp information as well so please be on the lookout for that survey it'll

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pop up as soon as we end the webinar okay outside of that justin derrick

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think we're all here i will uh turn it over to youtube great thanks malcoly thanks derek

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and thanks everybody for uh for attending another webinar um

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so today's topic is um it's a little bit different from some of the ones that we've done in the past so in the past we've either focused

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a little a little more on kind of client client client-oriented um you know

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topics or visuals or or or concepts um or we've we've talked a little bit

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more about tools um that you might use in your practice when developing um

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retirement income plans for clients um today's topic is is is kind of even one

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step removed from that we're we're talking more about um risk in retirement and how to think about that and how to

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visualize it um across uh time across different types of clients uh and so on

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um and so we'll be introducing uh some some ideas for for how to do that

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today and then connecting them to dynamic income planning which is a common topic that we

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that we touch on here so connecting these uh these ways to think about things with um

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the practical side of developing and delivering ongoing dynamic income

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planning to clients so helping them understand you know when it might be time for an adjustment to their

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retirement income either up or down

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okay so um this this concept of risk and retirement um is is

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actually quite intuitive um and it's it's uh it's exemplified here

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um the idea is really just that the more you spend the higher your income and income labs speak so we we think of kind

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of anything that you are spending on you know taxes lifestyle um

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you know baseline expenses discretionary expenses and so on um

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your retirement income plan the higher that is the more risk there is and by risk um those of you who've been with us

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before know that that we mean the risk that this won't be a sustainable plan and that you'll have to adjust the

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income down at some point typically that adjustment means a change in portfolio

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withdrawals um so withdrawing less from a portfolio although not always as as

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you'll see some examples here and that's kind of a crucial part of this generalization of the concept of risk in

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retirement there are other risks in retirement in particular inflation risk is one we'll talk about

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where a change in spending doesn't necessarily change the amount that you withdraw from your portfolio it might change how much you

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spend from from an incoming uh pension or something so the higher my income the higher my

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spending the higher my risk that someday i'll have to tighten my belt pull it back and conversely the lower my income

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the lower the spending the lower the risk that i might have to um to reduce

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that that spend at some point and of course what i didn't show here is there is always a flip side of risk and

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retirement which is if i'm taking on lower risk that also means at some point

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what i'm doing is is increasing the chances that i will actually feel comfortable at some point in the future

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raising my spending raising my income raising my portfolio withdrawals raising the amount i spend from incoming cash

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flows and so on and vice versa so if i'm spending more now i'm kind of already

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trying to take advantage of a higher standard of living and that's going to reduce the chances i'll get to have even

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higher spending in the future right so this is very intuitive you know i'm sure everybody um

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understands understands this trade-off but it's crucial to the development of uh of retirement

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income plans for clients right because we want to find a place where um both

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their needs are met and their comfort with this uh risk with the risk that

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that their retirement income plan has um kind of are are matched ideally um or

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find find the right balance um so we don't want to it's very easy to to

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reduce risk you know almost to zero just tell clients to spend nothing um but that obviously is is there's a big

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negative that goes along with that so it's this balance on the risk return trade-off which conceptually is very

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similar to the trade-off in investing right we would all love huge investment returns with no volatility on the

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downside but of course there's there is a trade-off um

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understanding this risk return trade-off can help us discuss or answer questions like

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these so kind of what's the shape of that risk return trade-off you know are are are there big changes in risk as i

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change my income or are they small um are they always roughly the same trade-off or are are things different

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depending on the risk level that i'm at um how does this tradeoff differ across situations so you know older and younger

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clients um clients with different you know mixes of of income sources

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how does risk change over time so as i as i kind of live through my retirement as i advance in my retirement income

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plan what what how would risk change and how do shifts in risk drive income

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adjustments so it can be difficult to answer these

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kinds of questions with with the tools that are typically available um

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in the in the planning world because often these focus on just giving statistics or visuals on one

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particular income plan so one particular spending level for example um but this is a very narrow way of of

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looking at retirement income and retirement risk because it just says okay maybe this is a plan to spend ten

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thousand dollars a month um this these will be familiar visuals uh or you've seen things like this okay

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we'll run that plan through a thousand different possible futures see which ones survive and which ones don't and

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give you a probability of success or failure from that but this gives us information only about a single spending

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level only about a single uh retirement income plan when you're trying to help clients

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decide among different spending levels you know can i afford a little bit more should i would it be prudent to to spend

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less really we want to understand the range of possibilities

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um and that could in theory be done with with these kind of narrow tools but it would be through lots and lots of guess and

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check and you know yellow pads and manual um recording of results

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um so i want to talk today and derek and i have written about this a couple times

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on kitsis this this concept of a retirement risk curve which offers a

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broader view it kind of brings front and center the idea that that we're helping clients make a choice about spending

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about standard of living in retirement that um where there are many possibilities and

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really there's not even a right answer certainly not a right answer for every client

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rather just like in investing we're kind of trying to find that sweet spot for for a

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particular household so this concept of the retirement risk

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curve is it i would think of it as similar to you know the efficient frontier in

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investing you're kind of saying hey across a range of risk levels here we're going

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from you know zero to a hundred which just think of this as as the inverse of probability of

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success for for our purposes today so a zero risk level would be a hundred percent probability of success um of

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course this is always estimated risk level estimated probability of success no one is ever you know guaranteeing uh

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things right it's within a model right so our model of the world our capital market assumptions and and so on but

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what we typically get is a picture like this so for every risk level

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uh you know again risk being the chances that um this won't be a sustainable income level and i'll have to pull back

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at some point in the future to be prudent and keep risk in line

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for every risk level there is an income and so we can kind of see that these are

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this is the range of possible possible incomes within this particular analysis for

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for this household now this is a super simplified household with a million dollars in a 60 40 portfolio

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funding their lifestyle completely through withdrawals um and of course this is um this is rarely we rarely find

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situations that are this this simple but it's a nice kind of you know in the laboratory uh

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situation to look at and this kind of thinking about the range of possible

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income allows us to ask questions like you know would these folks be willing to take on

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10 points of risk in exchange for 14 percent more income so if we look at the difference between

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the income available at risk level 10 which is 90 probability of success right if we're kind of translating to that uh

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language um those of you who've been on these webinars before know we

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really uh prefer getting away from that kind of language it tends to psychologically be the wrong messaging

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uh success and failure messaging so we we tend to do the more neutral risk level but going

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from 10 to 20 adds you know 14 more income is that is that worth it for this

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couple obviously that there's not going to be one answer for every couple uh or for every household

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for some people certainly yes um is it worth giving up 10

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of uh the possible income the possible spending uh in order to save five points in risk get five points

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lower risk that's the difference between a ten percent risk and fi five percent risk here right so i

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go from forty five six down to forty thousand nine 900 a year

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we can see this this idea that there's a trade-off here much much more clearly by by understanding the range of

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possibilities so we're not when when understanding this we're not

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tempted to kind of you know gamify this and try to always seek the lowest risk level no more than

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in investing we would be right we're trying to match um in this case income and spending with

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needs and with risk preferences we'll also see that

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different situations will have very different risk curves now typically the risk curve looks like what you see on

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the left here which is the same curve we just saw before for withdrawals from a 60 40 portfolio but on another extreme

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if if a household were depending completely on social security um

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really um i mean this this does simplify a bit it assumes that there really is no risk in

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social security that you know social security uh inflation adjustments are exactly matched to this couple's

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inflation experience and that uh you know the risk that that social security benefits will never be uh will ever be

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uh reduced is zero but with those simplifications it's just it's always the same the same

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spending level for these folks sixty thousand dollars a year right um

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but crucially this idea can capture different types of risk so this is a um

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an example that i really like because it shows how it's risk in retirement is not just about

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portfolio experience you know the returns the sequence of returns that

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someone might experience so this is an example of a household with a 60 000 nominal pension so a pension that's not

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adjusted for inflation at all um and we see at different risk levels the

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amount that these folks would spend from that five thousand dollars a month

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uh and the amount that they would save um or i guess these these numbers are actually annualized

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and that savings in this example would go into an 80 sorry a 20 80 portfolio so

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80 um bonds so there is some sequence of return risk here although it you know

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initially there's no investment whatsoever um so this is as close as we can get in kind of a

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realistic situation to isolating inflation risk so there's very

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little sequence of returned risk here there's there's a high level of sequence of synchronous

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inflation risk um and we can see that you know on the extreme if we were

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trying to keep uh inflation risk to zero um so within this model

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basically looking at the worst possible inflation sequence um in in the in the analysis they would

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spend only thirty four thousand one hundred from sixty thousand dollars in income initially they would save twenty

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five thousand nine hundred into a portfolio that they would try to grow and then use in the future

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to make up for accumulated inflation someday so over time that amount that they're spending from

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their their nominal check of sixty thousand dollars a year five thousand dollars a month would go up so they'd

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start spending more and more of it to keep up with inflation um after some point

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they would actually be spending all 60 000 of it and then they would be drawing also from that portfolio that they've

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been accumulating over time right um and so here again we see the exact same idea that these folks would

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be in a position of asking you know what's the trade-off that i'm comfortable with here right could i

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really feel comfortable spending only thirty four thousand from a sixty thousand dollar check every month uh every year

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um you know would i be more comfortable kind of with a coin flip uh saying well let's spend forty six eight

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uh and save the rest that has a uh a risk of 50 here again no right answer

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would depend on the um the household's spending needs what they feel they can actually

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build a lifestyle with it would depend on the advisors you know evaluation of their situation

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their their ability to to take on risk right the possibility that they'd have to reduce income at some point

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um and so on but it's the exact same thing we're dealing with there's a range of possibilities we need to figure out you

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know where on this range of possibilities to begin a a retirement experience

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um the other great thing about this concept of risk and risk curves is it it can handle complexity as well

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so we just looked at portfolio withdrawals alone uh we even saw one that was just social

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security and then we saw one that is only nominal um a nominal pension

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but of course most people have a more complex example so uh that's what we're

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showing here this this uh shows kind of a mixture of portfolio withdrawals

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social security some of it which begins at you know at different points

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a a nominal single life pension so also we're dealing with some some mortality

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risk there um a 1 000 a month rental income with projected three

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percent increases annually so that may not keep up with inflation in certain situations

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on the other hand in other situations it might exceed inflation uh and the retirement smile so a plan for changes

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in spending needs over time um now this looks really complicated how are we going to

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um you know handle it and derek and i have talked before about you know how this kind of um pretty

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common situation where social security is delayed and there's a mix of different uh different income sources

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makes applying kind of uh you know basic withdrawal rate based

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uh dynamic planning approaches so adjustment rules withdrawal rate guard

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rails makes that uh extremely difficult or basically impossible in a situation

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like this so we need something more and we've talked before about how what we need is is again a holistic risk

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measure and that's exactly what's being shown with the risk curve so here is the risk curve for that example

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i just showed you um and this is now including market risk because

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they're depending on a 2 million portfolio inflation risk because they have a nominal pension

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and a uh and a rental income that's not you know exactly tied to inflation

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and chain uh mortality risk because that pension is single life uh and uh spending plans changing with age so

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the retirement's small so initially they're taking about a hundred and twenty thousand dollars a year from that two million dollar

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portfolio but that's gonna change over time or at least that's that's the plan uh and again we see that we can make the

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exact same uh go through the exact same process of okay there's gonna be a range of possible incomes possible spending

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levels possible standards of living that this household could have and we're

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just gonna have to find a level that kind of strikes that balance between you know the lifestyle that they would like

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and the risk that they're willing to take on so

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the advantage of this um is again this broader view of risk return trade-off across you know and

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helping us understand that you know there's not one right you know probability of success there's not one right risk level that that uh clients

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are um are able to have different preferences along this this spectrum of possible behavior

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also the advantage of this this concept is that we can it encompasses a broad range of retirement risks and it's not

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just about portfolio withdrawal levels and in fact trying to distill out only portfolio

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risk um can really be a problem in a situation where there really are lots of other risks that need to be to be

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brought into the into the conversation this visualization

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um although you know at income lab we are um looking at adding this in a very kind of advanced part of our software

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it's really more about conceptually understanding this range so that that range of incomes is already available

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you know for example on income lab but by just moving a slider right seeing how income changes as you as you change risk

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so again this this is extremely unlikely to be useful in a in

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as a visual used in a client engagement so this is a tool for advisors or maybe even just a tool

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for conceptualizing the the planning process for advisors

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okay so let's step away from uh you know this just this concept of you know how do we

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choose an income level and balance risk and uh and standard of living and talk

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about how we can use these visuals to understand what underlies a robust

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approach to dynamic planning so again derek and i have written and talked before about how

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a dynamic planning system that that uses holistic risk or total risk

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guard rails um is much more scalable across

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a client population and across time so it adjusts very well to changing

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longevity as people age to changes uh in you know inflation expectations adjust

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you know changes in longevity or in um legacy goals and and so on um so

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i'm now going to go through an example of how one would get to

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um an income adjustment plan keep in mind though

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this will you know include lots of uh lots of interesting uh uh visuals but

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only at the very end will we see the visual that a client would see which is really you know expressing an income adjustment plan as much as possible in

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dollar terms right just saying hey here's the the simple um you know adjustment plan that we have um

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so just to start out the the concept behind dynamic income planning is really that retirees at least retirees who are

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you know kind of um being prudent or have an advisor uh they don't fail they

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they adjust so people don't um you know adopt a a particular spending uh plan follow it

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exactly come hell or high water and in a bad situation you know run off a cliff

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wiley coyote style the evidence is that that's that's not what people do

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it's probably quite complex but um again we've talked a lot about how one of the

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great values that an advisor can provide is advice on when and how to change when

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and how to adjust so that that involves ongoing monitoring of a plan the client's

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situation updating and then um you know in a in kind of a practical

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sense providing adjustment advice you know only when it really seems worthwhile most administratively nobody

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wants to adjust their income or they're spending monthly um and and also kind of when when risk is

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out of line enough or inflation has accumulated enough that that really it's worth a it's it's worth a change

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okay so how would a retirement income plan that is dynamic in this way that that says

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hey we we will make adjustments um on the upside or the downside um whenever

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it seems prudent to do so how could that be understood and visualized with these um with these risk curves

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well um let's imagine we have our our uh our family with the million dollar 60 40

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portfolio and that they've decided a risk of 20 is reasonable for them

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um you know there may be many things that go into that um and it would not just be the

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understanding of okay well it's 51 900 uh you know how do you like that right

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there are other things that we've talked about before to kind of map out what risk could look like for for these folks so it would be

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okay what kind of long-term experiences might you expect adopting this plan and so on but we'll focus here just on the

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um what we call the the near-term adjustment plan so let's say

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that you know they're they're targeting an income with a risk of 20. um but if risk of their behavior of that

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spending behavior ever goes down enough they will increase their spending

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increase their income in this case it would just be increasing their portfolio withdrawals right and we've set that guard rail at a risk of five

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so if they're beginning retirement with risk of 20 we're saying well you're comfortable with a risk of 20. if things improve to

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the point where that the risk of spending 51 900 a year from your

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portfolio if that ever is down to five because of anything that could have reduced your

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risk increases in your portfolio balance um a shorter plan because you've lived a while um

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maybe it's that you actually didn't end up spending uh that that full 51 900 a year and so your portfolio balance is

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higher than expected not because of outsized returns but you just spent less for any reason if the risk of that

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spending level is down to five we're gonna we're gonna bring it back up we're gonna bring it back up to 20. that was a risk

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level you were comfortable with to begin with so we'll just reset it right so 20 already has quite a nice risk buffer

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right it's saying you know there's only a 20 chance that this is that this is too high

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um and so if we ever find that we're being you know even more conservative

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or you know where the risk level is really appreciably lower than where we started

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out um we'll feel comfortable saying hey you could afford to loosen the belt right live a little

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and so let's say 10 years later these folks still had a million dollar portfolio

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so now there's some there's complexity with inflation we'll just ignore here but um

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and they're still spending 51 900 from that portfolio

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and their plan is now 20 years instead of 30 years we've talked before about how actually you know a plan doesn't

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decrease one year per year lived but again we're simplifying well at that point

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a risk of five is now 53 200. so their spending their current spending

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of 51 900 is well below five right so they can afford to increase their income

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increase their spending increase their standard of living and at this point if they went back to 20

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they would be spending 65 300. so what we see here is that just with a passage of time with 10

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years less of a plan um if they had just maintained that portfolio balance their entire risk

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curve shifted up right what that does is that says hey there's a higher income available at

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every risk level right and we hit our lower guard rail here right that

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this this um basically our current spending was reducing in risk over time okay time to

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time to increase now this isn't the right you know dynamic uh increase plan

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for every client situation right it's just an example

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okay what about on the decrease side right this is actually what people will often worry more about although i think

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it definitely behooves us to remind people you know if risk is down enough we will give you good news as well but let's let's look at a case where risk

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goes up so in this case we've set a guard rail um at a risk of

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60. we've said if that spending level 51 900 ever goes up

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to 60 uh we'll reduce our income we'll reduce our spending we'll reduce you know

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unfortunately our standard of living so in this case imagine 10 years later

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in everything you know we're at a 20-year plan and so on but we have 600 000 instead of a

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million that in this case would be enough to trigger a change um because we see here

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uh that you know our um our initial spending of uh 51 900 on the

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red line um the entire risk curve the blue line has gone down because we have you know

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basically less income available at each risk level um and now the income that would be

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available if we had a risk of 60 would be 51 200 which is lower than our 51 900 that

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we are spending so this plan would say it's time to tighten the belt

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now you could reduce income all the way back to the original target of 20 which would be

30:05

39 300 but that's a large adjustment and what tends to make risk curves go

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down is you know bad stuff right so there's been some sequence of returns or some some change that was negative

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um so often uh clients won't necessarily want to rip off the band-aid so to speak completely

30:25

refill their risk buffer and say yeah things could be just as bad again right we could experience that same bad

30:32

sequence again um they might do that but more often they would want to say well let's take a

30:38

small step back and see if things keep getting worse or maybe they get better and so i wouldn't have wanted to

30:43

overreact in this plan maybe they would reduce their

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income their spending their standard of living about 25 percent of the way back to um to their uh to their original

30:56

target so they'll go to a risk of 50 which is uh 48 200.

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okay so just to sum up uh an income increase plan it has a trigger

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point right it says if current spending behavior reaches some risk level a which is lower than we started we're going to

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increase our income in this case increase our withdrawals um and then there's an adjustment part

31:24

of that plan which says you know and increase it to some risk level typically and as seen

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in this case it's just go back to where we started go back to that risk level the decrease plan says if my current

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spending behavior reaches a risk of something else a higher level than we started with and actually

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it really should be a higher higher than 50 level right because we're saying it we want we want it to be more likely

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than not that we're currently spending too much um so if if we're below 50 we're saying well it's still more likely

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than not that i'm fine so typically you'd want a trigger point higher than 50. and we're going to

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adjust in some way maybe it's back to our original risk level but more likely it's you know stepping back a little bit and then

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seeing you know we might we may have several decreases or it may be that one decreases is nothing we wouldn't want to

32:13

have over overreacted okay

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so from this we see that adjustments happen because risk is

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changing either because the risk of any particular spending level uh has gone down that

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means the risk curve has gone up or because of the reverse every spending level now has higher risk the risk curve

32:37

has gone down we can actually use that and i no one would ever want to do this uh

32:42

manually right you this is one of the one of the nice things about what income lab does is we provide all

32:48

this for you but you can actually provide a short-term income plan to a client saying hey

32:55

if our you know portfolio balance changed in such and such a way we would make an

33:00

income adjustment and this would be the income adjustment so we can provide dollar based uh a dollar based income plan to clients

33:08

and what's going on behind those numbers is we're trying to figure out what would

33:13

change our risk enough that we would need to change uh our spending level

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um both on the upside and downside and so that's what you see here the blue line is the beginning point

33:25

um it turns out if you know within the near term you know

33:30

tomorrow the next year the next couple years we were up to about 1.27 million call it 1.3 million

33:37

this particular situation would go from a risk of 20 to a risk of five and so we would we would

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uh our plan would call for a an increase in income to get us back to that 20 level

33:48

uh on the other hand if tomorrow the next year the next couple years we were at roughly um 740 000

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but the reverse would happen our risk would suddenly be at 60 and it would uh be calling for an adjustment down

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um this is you know a complicated view that uh is really just showing there's

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there's a there's a method behind this so

34:13

um you know this is this is not the same plan it's it's just a more complex example

34:20

from uh you know of a of a client with social security and and other income sources um

34:26

but when you see okay what's my proposed income well that is choosing from that range of

34:32

possible spending levels that possible ex range of experiences that we talked about the very beginning which is look

34:39

there's some range of spending you could afford it's just up to finding that that balance of you know lifestyle versus

34:46

risk tolerance and for these folks it's a little over fourteen thousand dollars a month

34:51

um gross of taxes the income adjustment plan for these folks is

34:56

uh very lopsided this is this is also somewhat typical um because clients tend

35:02

to be risk averse and prefer the upside to be closer than the downside for so for these folks a five percent

35:09

increase in the near term of their portfolio would lead to an opportunity for an income increase a 20

35:16

reduction in their portfolio would lead to a trigger of an income decrease um

35:21

so again these risk curves are really i'm trying to show how conceptually that

35:27

range of possible incomes actually is behind the concept of total risk guard

35:32

rails and an income adjustment plan um but i hope you'll agree

35:37

this kind of view where we're talking as much as possible at the right level of abstraction which typically if we can is

35:43

in dollar terms um is is is much more understandable um to clients um and

35:50

really to everybody uh me as well then you know the the more abstract you know

35:56

risk curve based visuals but it's important to understand you know this isn't a black box they're they're these

36:02

adjustments are really based on okay how does total risk change uh over time

36:08

okay so that's uh that's the presentation portion of this derrick i know um you have uh

36:14

thought about this quite a bit as well so i'll open it up to to you for everything uh i think just in in general

36:21

i've had a lot of you know conversations with with client or with advisors lately where

36:26

there's been a few different kind of common themes one a lot of the stuff we're talking about here right that's that's behind the scenes right you were

36:32

working towards this simple presentation for the client um kind of some some confusion there because some of the writing we've done

36:39

at kidsus.com has gone really into the weeds of how you do all these different pieces and things that justin's talking

36:45

about here today um but you know ultimately right this this is what we're trying to get to but get to advice that is much more kind of

36:54

accurate um and you know a better fit for the client's actual income in retirement

37:01

because it captures what's unique to them um and i think that there's really is this kind of

37:06

at least what i've seen pretty big divide between um kind of the withdrawal rate driven

37:11

framework where uh and that's historically what's really been kind of uh predominantly talked about in terms

37:19

of guardrail strategies and this total risk-based perspective which really does capture um you know the all the

37:26

uniqueness that we see in that spending curve and really helps bring that to

37:32

setting appropriate guardrails for a client and i think there's a little bit of a

37:38

even myself personally as we working through this and getting my head around it um kind of a learning curve to go

37:44

through there as an advisor but kind of once you see it and get it there's just so many limitations with

37:50

withdrawal rate-driven approaches that analytically i think it's absolutely the the right

37:55

direction to go to do that total risk perspective and can swap out

38:01

you know historical analysis monte carlo regime-based monte carlo use all those different perspectives when when it's

38:07

right but really with that risk-based framework so you know a lot of that that detail

38:14

ultimately never gets communicated to the clients that i'm i'm working with i'm talking about here's here's the analysis we did here's what you can

38:21

spend um they don't necessarily need to know that but i'm happy to go in that level of depth if they want to

38:27

but for most of my clients it's just helped me understand what i can spend and really living in kind of the view

38:33

you're seeing here all right thank you derek um

38:41

malcolm it looks like we have some uh some questions in the q a in the chat yes we do

38:46

um yep and i see quick q and a questions are coming in so please uh if you have any questions add them to

38:53

the queue right now um starting off uh question here is uh don't you reach a

38:58

point where increased risk actually buys you nothing and the income would either flatten or possibly go down

39:11

so it does depend somewhat on the on the particulars of the plan but

39:17

typically um

39:24

this is the typical shape of of the risk curve of the of the range

39:29

of the of the match between income level and risk level um so

39:36

uh it's usually kind of at the edges you see how it's steeper um

39:42

that's equivalent to think about the tails of a of a of a distribution um so

39:50

the if if you you know mapped out the possible income levels possible in this

39:56

case withdrawal levels um from a you know any kind of simulation analysis

40:01

whether that's monte carlo regime based monte carlo historical you will typically see

40:07

uh you know lower and upper tails uh the the left tail the low income tail

40:14

is typically shorter um and so this is you know for the for the math nerds this

40:19

is a log normal distribution um and so what we do see is that at some point the

40:26

cost of gaining uh lower risk becomes quite high uh so

40:32

that's what we see here you know if i was trying to go from uh you know a risk of 10 to a risk of five

40:38

i have to give up you know almost five thousand dollars a year but if i'm trying to go from a risk of five to a

40:44

risk of one um i'm having to give up you know almost eight thousand dollars a

40:50

year so there is definitely a point at which um an advisor would probably want to say

40:57

you know is this is this really worth it am i kind of you know pushing things so far to the

41:02

point where i'm i'm i'm forcing a reduction in standard of living um you know just to grab those last couple

41:08

points of quote unquote safety um so that's definitely happening here

41:13

you know the upper side of this curve is a little less relevant most people would would never be planning at you know a 90

41:20

risk equivalent to a 10 chance of success um but you do see that uh you

41:26

know that right tail the high income tail is quite long so that's why you you know

41:31

see such a such a a wider range there

41:37

and again that's basically saying hey that you know the best experience in this entire simulation um was

41:44

allowed extremely high income right 140 000 plus um

41:50

and and so yeah and then the middle section is is more or less linear so as you kind of

41:56

step up an income you just kind of gain uh gain risk uh or as you step down in

42:01

income you you you lose risk you gain safety uh

42:07

in in a roughly linear fashion so i think the the areas to really focus on where that is less true or kind of the

42:13

edges now a lot of people like to live on this left edge um you know kind of 20

42:18

and down or 30 and down equivalent to 70 success and up um and so i do think the

42:23

fact that it's not quite linear there is probably relevant oh derek do you have thoughts no i'd agree with that i mean that's

42:30

where we we definitely see i lose a lot of confidence when we get into those tales i i tend to focus my

42:37

planning on that um kind of a middle section where i do think it's going to be

42:42

much more realistic and uh i think for advisors that's the tendency is to go on the low-risk side so pushing towards the

42:48

risk of zero but just understanding that when you do that there's definitely much greater reduction in

42:55

income than you see uh you know for any other kind of marginal change along that curve

43:02

and then um this question is kind of a tie to what you all are saying so i'll

43:07

give this one out now um do you have any thoughts around selecting the risk level on the risk curve

43:14

any questions you ask clients to get a feel for their income risk tolerance

43:19

i i can jump in on that one in terms of when i'm talking to a client i often um i'm not not a huge fan of a

43:27

lot of the risk tolerance questionnaires and the way those operate but in terms of just having a conversation around how

43:33

important is it for them to maintain their standard of living how much do they feel like they could cut back if

43:39

they needed to and um it might might just be kind of a subset of

43:45

clients that i work with but actually a lot of my clients are in the situation where they

43:50

actually feel pretty comfortable if they had to cut all the way back to their social security income as we kind of work through that conversation that's

43:56

where many of my clients get and because of that you know it helps me reframe the conversation around you know

44:02

you compared to a retiree that might need a more substantial sum from their portfolio to really feel like they have

44:09

their necessities covered they could take more risk in retirement if they wanted to and kind of open up that

44:15

conversation about uh you know what would they like to do instead would be giving would it be

44:20

doing things with their family um just kind of what would that uh that look like and kind of paint a

44:26

picture and then through that more qualitative conversation i definitely get more of a sense of like okay this is

44:32

somebody that absolutely does not want to take a writ does not want to take a reduction or this is somebody that feels like they

44:37

could and they prioritize spending now versus later just all those different qualitative factors kind of help me

44:45

flesh that out and find the right strategy for my client

44:50

have you found any um connection derek between um

44:56

i don't know like people who have typically sought you know jobs with with more of a stable

45:01

salary versus i don't know people in sales or entrepreneurs or

45:06

things that have kind of typically lived with a little bit more risk in their income in their working

45:13

years and that kind of capacity or willingness to to make that trade-off in retirement where

45:19

they say well i mean look i'm alive now i'm young now let's go and spend a bit i get it maybe i'll have to reduce

45:26

it's an interesting question i mean i anecdotally i'd say you know maybe i've seen a little bit of that particularly

45:32

on the i'm just thinking of some clients i know of in sales and um that maybe have a

45:37

little bit more of that there but uh i don't know if it's generalizable

45:42

enough but i think there's probably something to that in terms of just these different kind of psychographic profiles of retirees and

45:49

how they think about risk and how they've thought about risk in their career in their life and they're used to

45:55

somebody who's used to living on a more fluctuating income certainly would be more comfortable with

46:00

that going down compared to somebody who you know has received the same income with a cola adjustment each year

46:06

in like a very stable government position or something like that's going to be a very different experience i think to

46:12

think about cutting back significantly so um yeah i'd say limited experience to

46:17

really speak to it but i do think it um i i suspect there's something to that

46:24

i do recall um uh hearing about some situations where you

46:29

know people were using this framework to help um people make some early retirement

46:35

decisions and you know kind of this the probability of success uh results were

46:40

not great right when you see probability of success in like 60 or 50 or something you think okay well you can't retire

46:47

um but by framing it this way is like well here's the we can do it you know we can hit your

46:52

spending level um you can retire now um you know i think in a lot of these cases

46:58

they were maybe more on the 50 40 or 50 range of risk but then adding to it a and and here

47:06

there are parts of the visualization of of dynamic planning that we haven't talked about today things like longer

47:12

term views right hey um what could your what could kind of the landscape you'll be walking through

47:17

look like including some of those bad situations um and often you know the bad situations

47:24

in in that plan test you know dynamically over time were you know of course there were some negatives there

47:29

but they were able to say well this is this is the trade-off do i want to retire now and just take it look it

47:34

could could be like that um but could i live with it in exchange for retiring now which is in itself

47:40

something that that these clients wanted so i do like how this framework makes it clear that there's no one right

47:46

answer you don't okay when you hit this you then you're fine um it's really it's always this trade-off um so i think you

47:52

know sometimes people and i think these examples were teachers so you might think okay well they like

47:58

stability but you know um it's also there's a there's a plus in uh in changing your

48:04

uh your day-to-day uh life uh to more of a retirement stance so [Music]

48:11

this one's a quick one uh in income lab when you use the term proposed income are you referring to portfolio

48:17

withdrawals or the total income from all sources the total income from all sources yeah

48:22

and and uh the example here although you know you run into it every day where someone depends entirely on a nominal

48:29

uh pension um really highlights why that's important that it's not just about portfolio

48:35

withdrawals and even in the in the complex situation i think it's also important so you know here for example

48:40

so we see you know portfolio draws are quite high in the plan early they go down they step down and then they go

48:46

down because of the planned uh the retirement smile so it's always

48:51

about you know overall you know anything that's available to fund my

48:57

lifestyle my spending my taxes and so on and uh derek um when you said earlier

49:02

lisa also shared that her cl a sampling of her clients may not look like yours that very few of her clients would want

49:08

to limit income to their social security benefit particularly after the death of one of a couple

49:14

or one of the members in the couple um and i think you know to your point justin the framework kind of fits

49:21

clients on all across the spectrum um of risk and income lab does allow you to

49:27

right to factor in and then for those clients who maybe are unlike theirs derek's um clients really showing them

49:33

the impact of those portfolio withdrawals and some of those outside cash flows as well and i think that's a very

49:39

certainly everybody's going to have their unique kind of niche of clients and who they work with and their backgrounds and situation and so yeah it

49:46

not it wasn't the intent there that my clients are at all representative of everybody else's experience but in

49:53

regardless of who you're working with at least here you have the tools to actually have some of those conversations around the trade-offs

50:00

and have that discussion perfect and then uh next one is uh when

50:05

the market is correcting as it is now when or how often are adjustments to income recommended

50:12

yeah it's it's definitely on on everybody's mind uh right now um i think

50:18

last month um now it depends a lot on when you when you implemented a plan

50:23

that's income lab speak for for setting a plan to be tracked updated every month and to check whether you've hit an

50:30

income guardrail um so if you started relatively recently if you you know checked the box to have that implemented

50:37

and monitored you may not have yet seen uh you know a reduction even though obviously you know markets both on the

50:44

stock and bond side have been have been rough lately also the plan would have to have be heavy on the portfolio side um

50:50

but i think we did see a couple of uh you know we get aggregated stats on this a couple plans uh last month

50:56

or sorry in this month may um so we only update these plans monthly

51:02

um we we you know pull in new data where it's available or estimate what direction the portfolios have gone

51:09

we step everybody forward one month in their plan so that you know social security claiming is close or they may

51:14

have aged and so on um so we'll see in june um that cadence is

51:20

um is intentional um we feel that it kind of uh strikes a

51:27

balance between um people wanting to have updates right i mean when things

51:32

are happening especially like right now we kind of don't feel great about a plan that was implemented you know a year ago that

51:38

hasn't been updated um but also is not kind of updating daily or hourly which

51:43

has the potential to whip saw people so um yeah i guess stay tuned a bit to see what happens in june how many plans that

51:49

are currently implemented will be will trigger a a reduction alert for that

51:55

plan it would also depend on what the plan was if somebody had kind of tight guard rails then it would be more likely if their guardrails were a little wider

52:01

because you know those folks were more comfortable with that then then it might take a little longer

52:06

and this um next one's just a quick follow-up to that one and then after that i'll bring uh jc to ask his

52:12

question live um the question is so along those guardrail concepts when does income lab update linked accounts for

52:18

implemented plans is it the first of the month and the month or random tuesdays

52:25

so we we update everything um as soon as we have all of our data in which unfortunately is not the first

52:31

of the month it's usually the fifth business day of the month um so you know it will we'll call it the june

52:37

update but really it's you know the june 5th you know if there are holidays and so on it can be well past the fifth

52:44

weekends and so on um just one one thing i might add in general on that topic too is that

52:51

um you know i think advisors should have a plan in place too and uh you know how you want to approach that like if you do

52:57

have multiple clients all triggering an adjustment at the same time um that

53:02

in my personal opinion right just because you know i i like the monthly update but that

53:08

doesn't necessarily mean i'm going to meet with every client that month to talk through the adjustment like when you look at over long periods of time

53:14

and historical sequences and everything that's happening there you know whether the adjustments made

53:19

this month next month the following month um it's more that you get that long-term trajectory right rather than

53:25

you get it this immediate moment so i that is something i've talked to some advisors who feel like oh

53:31

it's going to be too overwhelming to get everything you know if everybody gets triggered around the same time but i

53:36

think you can be pretty reasonable about how you do that just because it's the software software's indicating

53:41

adjustment doesn't mean it absolutely needs to be made immediately yeah and actually i i do feel like the

53:47

monthly is a nice uh balance but just because we do it monthly does not mean that that is you know

53:54

analytically the perfect cadence in fact there may be arguments that should be even a little less frequent um we just

53:59

do it monthly so that you know the the plan doesn't get kind of uh

54:05

uh you know there's not a long lag between updates

54:11

and then uh jc i did bring you into the panel so can you hear us oh we can see you now

54:18

can you all hear me we can hear you great can you bring up the slide that showed the client communication versus

54:24

the detail showing like the 14 000 and then it goes down to like 13 7

54:30

i think if it goes down by like six percent there we go perfect um so for this slide i'm looking at the

54:39

i'm looking at the number in red real quick and i'm thinking about how clients would respond to this um

54:45

my thought is in terms of putting the client more in control and actually putting a lot of the um behind the scene

54:52

work that you've done here with the wrist stuff can you make that 13-4 instead of saying hey

54:58

put the client in control and us more of a guide saying either a we can reduce this to 13 4 or b we can increase your

55:06

risk or c you can start saving more now um so that we keep it sustained at

55:12

fourteen one is that um is how would using income lab how could i facilitate that conversation

55:19

so on the first point this is something derek has been beating the drum on and and it is coming just the ability to to

55:25

round these precision gives the false impression of you know total accuracy and so that's a that's a miss on our

55:32

part so we will be giving you the option to to show these in rounded uh

55:38

there's a little bit of work to do on this but most likely it'll be rounded to the nearest hundred like as you say and but i think the second part of that

55:45

is crucial so that that is when a a plan hits a guard rail

55:51

um they the the household does not necessarily have to continue following

55:56

the plan they might say you know um that two million dollars i was going to leave as a legacy you know i i think

56:04

maybe we we could do 500 or you know there are other levers you can pull at that point that would allow them

56:09

potentially to continue uh at the same and it just buys them a little bit of a little bit of time and

56:15

so on yeah it's a it becomes a decision trigger right like when you have here's three things you can do as opposed to

56:21

saying you have to do this so yeah okay so i'm glad derek's beating that that wardrobe as well yeah

56:29

yeah it's really when you hit a guardrail it's you know probably time to have a conversation

56:40

thanks jc um and then uh next question here uh let's see oh uh lisa so uh more often trying to

56:47

get clients to reduce non-discretionary expenses through housing or mortgage decisions have been tough sales or to

56:54

let clients know that discretionary expenses will fall over time um

56:59

i guess we're more of an interesting kind of thing i mean i suspect that's true i know derek uh it sounds like

57:04

maybe you have a lot of clients whose discretion non-discretionary expenses are are low enough um that they can

57:10

absorb that but what are your thoughts yeah i mean i i think it definitely does depend on the nature of your your

57:16

clients and their spending and where all that's at i just happen to have a lot of clients who are very frugal and no i'm

57:22

i'm usually pushing them to spend more than the other direction but um i do think you know the understanding the

57:28

nature of spending what adjustments are possible what aren't um you know having all those conversations going into retirement and

57:34

understanding where that fits um is useful and there is also functionality within um

57:40

you know the software in terms of um you know putting in like a floor

57:45

of spending right so you can say no you know i have these crucial expenses i

57:51

i can't let it dip below that um and then adjust accordingly so there is some way to uh to build some of that in if

57:58

you know yeah giving your clients uh non-discretionary income or expenses

58:03

they need at least a certain level of income you can build that into the plan yeah let me i know we're about done with

58:10

time here but let me share um how that's done so it's kind of a

58:17

just a random example here but if you go to the advanced settings in a plan this is not often

58:23

used but if you go to income settings

58:29

you can check you know maintain at least your essential income level so if you've

58:35

defined that either just explicitly there's a spot to say what's my essential essential monthly income or

58:41

if you've you know built a full budget and defined each budget item how much is discretionary how much is essential um

58:48

you can pull that in and this will set a floor on the

58:53

on the monthly income and say hey we'll just accept more risk instead of reducing our income below this level

58:59

um there is a point you can set a trigger that says well we'll accept that risk you know until our portfolio has reached

59:06

x uh yeah i mean 250 i have no idea if that's a good level to put it at depends on where you where you started and so on

59:12

but there is a way to do this now keep in mind uh you know if you said if you say yeah

59:17

maintain it and maintain it no matter what then you're introducing uh you know

59:23

the opportunity for for portfolio to run to zero which might be fine if there are other income sources but that's uh

59:29

that's what this would be doing well guys yeah thank you again so much

59:35

justin and derek really appreciate all the time and effort you guys put into these webinars um i know our users always give us good

59:41

feedback after each one so i just want to say thank you and thank you to everyone who

59:47

attended um and for all your questions as i mentioned after i end this there will be a quick survey to fill out your

59:53

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59:59

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