The Retirement Distribution Hatchet Webinar - April 2022

good morning everyone thanks for joining our income lab webinar today uh we are

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excited to bring another topic around uh retirement income specifically focused on the distribution hatchet i see we

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have some more folks joining in so we'll give another minute or so and then kick it off

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and this uh webinar is uh our first of many cfpce credit webinars so um

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as long as you say for 15 minutes i believe is the cut off you will uh be eligible for an hour of cfpc credit

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here see some more folks coming in

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well we'll get started now um welcome everyone uh if this is your first time to one of our webinars we are excited to

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have you here we will have a first half will be a presentation done by justin fitzpatrick

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and derek darp and then afterwards we will open it up for q a um in which you will see in our zoom webinar here

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there's a q a section where you can drop in your questions look for other people's questions and even like and

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move them up in the queue and then once we open it up for q a we'll just walk through uh go through that q

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um quick housekeeping item as well uh we do have another webinar coming up on the

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26 on a few weeks that will also be eligible for cfpc credit i will go ahead

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and drop that link in the chat as well for folks who want to go ahead and register for that webinar

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outside of that derrick justin i see we have you both here i think we can hear you all okay so i

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will uh go ahead and turn it over to you guys okay thank you malcoly thank you derek

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um so today we'll be um kind of returning to one of these uh

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these topics that sort of straddles the the um two fields

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of sort of theory of financial planning and practice of financial planning so we'll

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be talking about um you know how to set up a way to robustly do dynamic

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retirement income planning so it's very fairly clear i think from at this point decades of writing and research on

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retirement income planning and and experiences that

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um planning in a static manner meaning kind of you know setting up a retirement plan at the

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beginning of retirement following it to the to the letter um you know and never making changes that that's not a a way

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to have good experiences um so instead um there's a lot to be gained from

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uh being dynamic making changes over time much in the way that we would in our working years so really um you know

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not not a difference between working years in retirement but but a continuation um but there's a big

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question on how exactly to do that and then a practical question for advisors of how

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to scale it across a client population and then

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you know how to do it through time in a way that is again robust and would be fairly confident that that we're giving

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good advice um so dynamic income planning is an area

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um where there is a lot of of research and writing over the last um

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20 or 30 years at least and um some of what we'll talk about today is

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really building on that you know kind of we'll point out some some places where those ideas um

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are a little bit uh problematic for for engaging with in real life um but we're definitely building on those and you

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know one reason that they can be a little problematic for um for actually applying with clients is

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often when people talk about dynamic retirement income planning it's in in a very research oriented context

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or maybe theoretical context would be a better way to put it where usually we kind of strip away all the complexities

4:55

of a possible client situation often just like this what you see on the

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on the page here which is we'll just kind of consider a simplified plan where all retirement

5:06

income is funded by portfolio withdrawals and the uh the desired

5:12

income level over time stays the same in inflation-adjusted terms and and in

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practice these kinds of theoretical exercises are perfectly fine when used for for um kind of understanding

5:24

concepts in the world and so on um but they uh if they break down when applied

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to real client situations then we need something more more robust and that's what we'll be talking about today um in

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particular this might be more of a common type client situation um where

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retirement the costs of living and retirement are going to be funded via a variety of income sources

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that could be social security pensions even some part-time work or uh

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you know maybe one spouse is working earlier in retirement along with portfolio withdrawals

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to kind of fill in the gaps fill in the valleys um and also it may be that uh

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that the projected uh spending level won't be the same uh throughout time

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right so so one thing you see here is sort of this wave what's been called the retirement smile

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on the top line and this creates for portfolio withdrawals

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a shape that we've called the retirement hatchet so you see at the beginning of the plan

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we kind of see the head of the hatchet and then we go into the handle it's actually a very nice ergonomic handle

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because of the the retirement smile and this is not at all a strange um scenario

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it's it's fairly common in this case for people pushing social security out um a few years or maybe all the way to age

6:55

70. um you see this quite often and these kind of

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realistic uh situations make applying some of the um

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the kind of going ideas for uh dynamic retirement planning uh

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less and less useful even to the point where where they really just just won't work um so that's what we'll be talking

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about today so there are so many

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possible approaches to dynamic income planning that are in the literature that are in you know financial planning

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journals and so on that we we're certainly not gonna um you know go over them all today uh

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but in kind of reviewing the quote unquote traditional approaches to dynamic income planning probably the

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wrong word to use since uh dynamic income planning has not been around all that long um but when

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reviewing them we usually can can find that there are some set of triggers

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for adjustments right so sort of hey why would when and why would i make an

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adjustment and then a okay and what do we do given that we do need an adjustment so

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for example um you might have an adjustment trigger based on portfolio balance you might see something like

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okay if my portfolio balance ever reaches a hundred and fifty percent of my

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beginning balance uh you know maybe in inflation-adjusted terms then

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i'll be allowed to increase my income you might see something like tracking

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withdrawal rates over time this is probably the most commonly um

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you know attempt for advisors who attempt a real systematic dynamic income planning this

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is often um something that uh that i've encountered so you'll track withdrawal rate over

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time if it gets too high meaning the amount of money you're taking compared to your balance

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is too high reduce income if it gets too low the amount of money you're taking

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divided by your account balance gets too low because the account balance has gone up um then you'll increase income

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or there are also a variety of methods that fall under the rubric of rmd

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methods that just say okay over time we'll kind of try to keep track of um

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of life expectancy and adjust withdrawals based on that um each of

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these has merit to it um in particular the last one is we'll

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we'll go over some some some of the the issues behind the scenes on it um but

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we'll also see that uh there are problems um

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and then if you look at how adjustments are made sometimes um it will we'll see something like you know uh

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increase uh income by 10 decrease it by 10 some sort of you know some sort of

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number that's that's preset or you might see a floor or ceiling that'll say hey i'll never go above

9:58

maybe 10 or 20 more than i started with or below a certain amount uh anytime we set a floor of course on on income we do

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bring the possibility of actually running out of money in um to the situation so that's uh that's not always

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the the greatest idea and then finally um we might see something like

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uh you know if if it seems like we're taking too much we'll skip an inflation adjustment um

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the uh the apparent advantage of the last one is um

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that's a way of kind of decreasing income without it being obvious

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to clients right so it doesn't seem as painful if somebody skips an inflation adjustment as if they actually get a

10:40

decrease in their income these sort of traditional approaches can

10:46

can seem to have benefits so they seem easy to manage because the the rules can be stated often very fairly simply right

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with actual numbers um and those rules tend to have some kind of intuitive link to risk all right so

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if my withdrawal rate is getting too high well maybe that my risk is getting high

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and they've been treated pretty extensively in research so you can find you know writing on this which is nice

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the challenges that we'll see is there's a fair amount in in most of these of kind of arbitrariness by which i mean a

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lack of a link between the approach and the rule itself or the

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the system itself and what we're really trying to accomplish which is kind of keeping a client's retirement on track

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with all of the information that we actually know about them at at that time so we're going to go through an example

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of this this arbitrariness can actually lead to some real problems so it can actually

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end up triggering adjustments in the wrong direction for clients which is almost sort of the worst

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nightmare for for doing this kind of planning is if if an advisor is giving advice on making an income adjustment

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we'd hope it's at least in the right direction um but but there are scenarios that where that wouldn't be true

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and the biggest challenge that we'll go over is these don't scale very easily to realistic client situations

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so kind of group the first two problems together the arbitrariness and the wrong direction problem and and we'll actually

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look at kind of that basic client situation again i know at the beginning

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i was saying what's important is that this uh that any approach to dynamic income will

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scale across client situations and across time and that's definitely true but

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these first problems actually apply even to the simple income plan this sort of

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toy simplistic approach so we'll go through an example

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of an arbitrary rule so let's say that we had a million dollar portfolio

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withdrawing 45 000 a year adjusted for inflation with a legacy goal of 250 000 adjusted

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for inflation and we're gonna really simplify this and say that annual returns are five percent

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a year and inflation is three percent a year um obviously this is extremely simplified

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and not the kind of thing we we typically would see but it by simplifying it we can we can

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see uh the problem with with the rule we'll have and the rule is um oh and i think i missed there's

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also a section in here in red where returns go from positive five percent real returns to negative

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negative one percent returns now we're going to apply a rule which says skip inflation adjustments

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following years with negative real returns um this is a an actual rule you'll find um explored in in the

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literature and in the in this situation we we end up with then nine years of income

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reductions but it turns out those income reductions are

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they're unnecessary so we end up with 11 years of reduced income at 26 percent less income than we

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started with the problem is in fact

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after those first 11 years of reasonably good returns the situation we were in was not one

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where we needed to reduce income if things looked bad like if there were a negative year but actually we were kind

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of ahead of plan right so if we had reevaluated in year 10 we'd have said wow things are looking good things have

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turned out better than we expected in fact we could have afforded an income increase at this point

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and we might think well that's it's only in retrospect at the end of the plan but actually at this point um it would have

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been clear that we were ahead of plan right so even returning to sort of our our comfort level at the

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beginning of the plan our comfort level risk-wise we would have increased income so this kind of rule about skipping an

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inflation adjustment because it's it's sort of arbitrary in a way it's it's it's it's separated from

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all of the facts on the ground leads us to to go in the wrong direction

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um now you might say okay well you're kind of picking on the skipping an inflation adjustment

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issue and there are other approaches to this and that's that's definitely fair enough um

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probably the the most commonly used uh approach in practice to

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dynamic income planning focuses on the withdrawal rate that a client is taking

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um so you'll set kind of a target withdrawal rate um let's in this example

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we'll say maybe our target is 4.7 withdrawals and then you'll set withdrawal rates that would trigger um

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a return to that target so maybe if we hit six we'll go down to 4.7 if we hit

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four we'll go back up to 4.7 um the advantages of this are that now

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we actually are tracking progress over time right so the last example where we were skipping inflation adjustments we

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one of the problems was we never returned to say well yeah but what are the facts on the ground you know how have things changed over time right so

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triggering it with a negative year well a negative year might be perfectly fine if it follows on positive years or if if

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we've if a lot of time has passed right um so there is an element where we're tracking progress here and it's not

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linked to that kind of arbitrariness of the inflation rate so this seems like a a possibly uh better way

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to go but the problem is although the

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plan is being applied dynamically meaning we can we can test those withdrawal rates over time every month

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every year however often and make those adjustments when the plan calls for it but the triggers the

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withdrawal rates themselves um are static so we would be applying

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that six percent um guard rail you know now let's say we're age 60 and

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the same guardrail at uh 70 or 80. um there are systems by the way that will

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stop applying guardrails at some very future age but again that's a fairly arbitrary

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point as well um and the fact is though that that the risk of particular

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withdrawal rates actually changes over time as plan length changes um that's fairly fairly obvious at the beginning

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of retirement right generally we would expect different advice if somebody came to you for the first time retiring at

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age 60 as if they came to you at age 75 right you would expect different um

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different results and so the problem with applying these

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static guard rails even if they're applied dynamically meaning over time is that

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we're not recognizing that fact we're not we're not applying the change in risk over time so let's say that our

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target here with this green line um which is about the four point seven

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percent withdrawal rate um the the blue box here is set at six

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percent right so even if our withdrawal rate followed the green line right so over time our

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portfolio balance is going down a little bit and eventually our initial withdrawals

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continued through time reached they're now six percent of the portfolio they're not 4.7

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at about looks like year you know 76 77 here that would have happened

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and so this rule decrease income if withdrawal rate hits six percent would trigger a reduction down to to 4.7

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again the problem is risk in that hypothetical situation hasn't changed at all right the the the the risk of a six

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percent withdrawal rate at 60 at 77 for example is the same as the risk of a 4.7

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withdrawal rate at age 65. so it's inappropriate to reduce income at that

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point right we haven't we haven't although we have continued to test we haven't updated

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our kind of picture of the world to recognize how risk has changed for for this client so even in this

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simple situation where the only retirement income we have is withdrawals from a portfolio

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applying withdrawal rate guard guardrails in this kind of static way can lead to problems

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the third problem that i mentioned was realistic climb situation so now let's add some complexity to to the situation

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one piece of complexity is what if we're planning for our spending needs to change over

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time as we age so this is a a common um

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a common finding in research um probably david blanchett's uh work on the

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retirement smile might be the the most well known although there's there's other research on this on kind of how

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people spend money uh over time often early in retirement

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they'll spend more when they're healthy and active and you know have some newfound free time we may even see

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spending go up year over year on an inflation-adjusted basis but then slowly it will

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it will tend to diminish for some people on an inflation-adjusted basis if we if we added inflation in here what you what

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you tend to see is actually just it may go up a bit but not as quickly as

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inflation does and then um some increases late in life um

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possibly for for for medical purposes and so on um and planning in this way just just

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kind of recognizing that you know age-based spending may be maybe different in my 80s and 90s than it is

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in my 60s actually has a huge effect on the available income early in retirement

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so where this is appropriate for for clients it can have a huge effect generally almost a 20 increase in income

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early in retirement in possible spending early in retirement so not

20:53

a rounding error so if if you were trying to apply this kind of planning

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but also apply dynamic guardrails using withdrawal rates you'd run into a really difficult situation so

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let's imagine we started at point one here the the the

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circle with the one in it taking 174 000 a year um

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we're targeting a 5.7 withdrawal rate at this point that is reflecting these

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these kind of uh newfound gains from you from using the smile

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and our decrease uh guard rail is at seven percent our increased guardrail is at uh 4.3 these

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again are all adjusted for for the expectations from the smile well what happens when we get to

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about um 11 or 12 years later um

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and if we followed this plan and we're now taking 150 000 a year inflation adjusted again right it's

21:54

probably more than we started with uh in nominal dollars what would we do

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if our balance has kept up in fact grown to 3.8 million

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our withdrawal rate would now be 3.9 percent that's below the income increase guard rail

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of 4.3 and so the guard rail would say raise your income but the problem is that reduction in income was actually

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planned right that was an expected reduction in spending so what should we

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do we would also almost need to distinguish between planned changes in withdrawal rate versus unplanned um

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it would become really difficult to apply these static

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kind of set in stone at the beginning numbers these withdrawal rate numbers it

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really just becomes untenable it becomes even more untenable when we add in the fact that

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most households will have other sources of funding they're spending in retirement

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than just their portfolios most commonly social security but often often other things as well a pension maybe some some

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part-time work and so on and and in this case if we're also doing the smile just to just add in

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all the complexity we can the planned withdrawals from the portfolio differ hugely over

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time so in this case initially these clients would be taking

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67 000 a year from a portfolio um it then goes to 55 000 as the plan

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change when mary starts social security um when john starts social security we're we're down to 24 000

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in planned withdrawals and then because of the smile much later on we're planning for only 10 500 a year um and

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so at this point setting withdrawal rate guard rails so using

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rates um can be uh again totally impractical this often

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is also a a a difficulty in you know

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we tend to be anchored to this withdrawal rate research things like the the four percent rule and so on

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but when applying it to a um an actual realistic example

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those intuitions that we've developed by being anchored to that research we kind of need to throw them out the

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window so in this case if this were a million dollar portfolio we might say well wait a second you know 6.7 percent

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sounds like a crazy withdrawal rate and it might be if that were the only thing going on right but because

24:33

of the hatchet shape here um that's that's a perfectly reasonable thing to do we might see withdrawal

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rates of six seven eight nine ten percent uh and and that may not be a risky thing to do given the planned

24:47

changes later on so i guess the

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the um the lesson here if we're trying to apply dynamic income planning which we know has a lot of value for clients two

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realistic situations is we we have to move beyond um some of these uh you know more some

25:07

simple approaches like withdrawal rate guardrails um we need something that allows us to

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update our understanding of a client's situation at each point and that's directly linked to

25:21

the risk of a client situation at any given time so thankfully for clients who work with advisors it is

25:29

not a one and done set it and forget it um process to do to to handle your your

25:34

retirement um funding it's a it's an ongoing process and so an advisor needs

25:40

a way to to to know what the risk is at any given point and then set thresholds

25:45

you know if risk gets too high counsel a reduction in spending if risk gets too low because that's that is also

25:52

certainly something that can happen let the client know that they actually could afford um to spend more

25:59

to loosen the belt so to speak um and then if those points are hit

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the advisor would ideally have a plan for what how adjustments would be made

26:11

right so these wouldn't be arbitrary but again we can actually use risk level you know to move to or toward

26:17

a particular risk level when we make that adjustment and this concept of income risk or

26:24

holistic risk has a lot of advantages especially the advantage that

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it can be applied over time to any situation and include the effects of all sorts of

26:37

complexity portfolio balance changes asset allocation fees expenses legacy goals

26:44

those plans spending changes other cash flows social security and so on can all be grouped in here

26:50

so that an advisor can understand not so much you know just what a portfolio withdrawal rate makes sense but really

26:56

what the whole what holistic income level what total income level uh works

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for a client um so one way to think about this and this

27:06

is definitely you know treading into maybe a more sophisticated view um but

27:12

something that could be really useful for advisors to understand about

27:17

making income or considering different income options for a client is that

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for any given risk level and you could think of this as you know probability of success or probability of adjustment or

27:30

probability of failure um for any given risk level

27:36

there is an income right so what we're doing in providing advice to

27:43

a client is is on retirement income is saying you know what's sort of your risk

27:49

tolerance your tolerance for adjustment compared to how much income that would provide you how much spending what sort

27:56

of standard of living that provides you in retirement and choices can be made along this curve right so you can see

28:02

here that this is generally the shape of this income risk curve we'll make

28:09

recommendations of income based on that trade-off right it is a

28:14

trade-off we can take less risk but there's a cost for that it's a cost of standard of living we could have higher

28:19

standard of living but there's a cost for that it's the cost of higher risk there's no right answer it's much like

28:25

developing advice on uh portfolio allocation right sort of what what is the tolerance and ability of a household

28:32

for um for risk and then we can set our guard rails using exactly the same concept so we

28:39

could say if the risk of our current behavior you know goes down enough if we go from you know 20 to 10 or five or

28:46

zero well they can afford an income increase if the risk of their current behavior

28:52

you know updated for all their current longevity and so on um ever goes up enough maybe it's to 60 70

28:59

80. well we'll reduce our income and the nice thing is this this pulls

29:04

everything together in kind of one risk concept um derek and i actually have an

29:10

article coming out soon about this um diving a little bit deeper into this

29:16

concept but probably the most important thing is i mean maybe for a few

29:21

clients some a visual like that would work what we generally want to do is once we've done that kind of analysis on what what

29:28

someone's risk is and our adjustments warranted we want to pull it back into a client

29:34

communication strategy at a level of abstraction that works for for most clients and as often as

29:41

possible we would like that to be in dollar terms so um many of you will have seen this

29:46

before but um we can talk about okay so your income and

29:52

at income lab we do this monthly um your income is x but and your current portfolio is in this

29:58

case 2.2 million but if that balance were to go up by a certain amount in

30:04

this case five percent um you could spend a little more right in this case about 700

30:10

or if that balance were to go down in this case by 20 um we would be counseling a reduction in

30:17

income all of that is based on the holistic risk concept that i just went over but we're not having to kind of uh

30:24

bring a client with us into all of the you know complexities of analysis and statistics right we're really

30:31

communicating with them at a level that they that they understand um often this is sort of the the

30:37

situation that we'll see especially early in retirement and um discussing things in terms of dollar

30:42

amounts can really go a long way toward client understanding and confidence in the plan

30:48

um that's sort of setting short-term expectations we also um

30:53

using uh dynamic holistic risk guardrails in this way

30:58

we can simulate a long-term experience so what if you know over the next 20 or 30 years

31:04

you increase income and decrease income using holistic risk um

31:10

and try to set expectations for clients or paint a picture of the geography they could be traveling through so

31:16

in this uh visual you're seeing kind of a long-term experience presentation okay

31:22

if we adopt a plan like this we might expect to be a that your total income over your

31:28

lifetime would be above what we're currently planning on if it is above maybe you know an average

31:33

of 26 in this case but it could also be below but we can also set expectations or or paint a little bit more uh picture

31:40

on on magnitude on the downside so in this simulation for this example household 12 of the

31:47

time they did end up with total lifetime income below the original plan but on average it was only three percent below

31:53

and in the worst case it was 12 below um neither of which are particularly comfortable but

32:01

definitely not you know failure so the advantage of going from

32:08

you know withdrawal rate guard rails or you know skipping inflation adjustments and so on to a holistic view of income

32:15

risk is it's actually easy to communicate when done in dollar terms

32:20

and from an advisor's standpoint it it handles the complexity of real life so you're able to apply that across

32:26

a client population and through life right 60 year olds and 80 year olds um and situations with complex

32:33

um cash flows and so on um the challenges are you need more robust

32:38

analytical tools but that's it's worth the the challenge essentially because of

32:43

the the um the ability to to make sure we're really handling realistic client

32:50

situations right not um kind of for our convenience ignoring particular parts of

32:55

the client situation but really giving customized

33:00

advice and again derek and i have an article um probably a series of

33:05

articles actually i'm dealing a little bit more with these these kinds of concepts

33:10

um in in the next in the next couple months so i hope you'll enjoy those um so derek

33:17

i know you um uh apply this in in your own practice and uh you know you and i have worked

33:23

quite a bit on uh on these concepts so i'll open it up to you yeah yeah i think one of the

33:29

the real challenges with you know thinking about and talking about this is there's really two different conversations going on i think justin's

33:36

alluded to that well and that on the one hand there's the you know as an advisor

33:42

analytically you know what can we do to provide the best kind of strategy and plan going into retirement uh but then

33:49

on the other side there's the actual in practice you know what what are we communicating to the client

33:55

and you know a unique tension here right is like we're we're talking about doing some really

34:00

sophisticated stuff on the the analytical side uh you know actually going much deeper you know beyond just a

34:07

basic monte carlo type simulation but at the same time we're bringing it back to a report you know that ideally should be

34:13

simple and easy to understand and so communicating in dollar terms uh showing the guard rails that income adjustment

34:19

plan like that to me you know when i'm when i'm working with a client that's really where the focus is at

34:26

you know sometimes looking at that long term income

34:31

the long-term income experience just to make sure we have the right sort of plan in place

34:37

if it's somebody that does feel inclined to take more or less risk for that higher lower income that's a

34:43

disc conversation we can have with some actual metrics to kind of put behind it but yeah at the end of the day

34:50

it all boils down to these these total risk guard rails and

34:56

once you know once i'm meeting with clients this is really generally what i'm actually focused on and i'm not getting into the

35:03

details of all the complexities behind the scene and you know the spending curve and all

35:09

those different things that um you know are there but at the same time my clients are benefiting from that in

35:16

terms of setting guardrails that i think are better for them uh but also just at the end of the day getting the

35:22

report here so um i'm sure there might be a few questions but to me that's something to keep in

35:28

mind is that there's always these two different there's the analytical side and what

35:33

we're doing is advisors there's the communication side and we're actually showing the clients and those should

35:39

probably be very different sets of information

35:47

okay malcoly i think we can uh open it up to some to some q a

35:58

uh i see we already have two questions in here um please uh if you have any questions please put them in our q a um

36:05

and uh watch other people's questions because you can also um like them and move them up in the queue as well but

36:11

yeah starting off uh first question is what's an appropriate method to set the thresholds for instance a couple with

36:18

two pensions and two social security checks that need very little from their portfolio could have a much lower monte

36:24

carlo success rate than a couple that relies on their investments for most of their income and requires a higher and

36:30

carlo success rate yeah i mean it's it's a really good

36:35

question it goes to the that fact that things can be really idiosyncratic um

36:42

derek do you have some thoughts there yeah i mean for me there's definitely

36:48

i think what this is primarily getting at is that there's the whole magnitude of adjustment or the failure

36:54

there right where if you've got two pensions two social security checks you don't need much from your um portfolio

37:00

i actually i work with a surprising number of clients that are in that exact type of situation where i'm running

37:06

these projections for them and they may not even necessarily want to be

37:13

you know spending at that level but this definitely provides some you know ways

37:18

to look at projections in terms of estate balance conversations there what is the goal right if um you know it uh

37:26

i don't know that i adjust the thresholds necessarily you can go in and adjust the i guess it depends on what

37:31

you mean by thresholds but there is the income risk setting adjustment um

37:36

you know i do find that as a general rule i think people tend to err on the side of

37:42

uh if they don't have to take risk they wouldn't like to so when i can bump those you know over to a more

37:47

conservative type of plan in that scenario where it's really more upside and not you know

37:53

they're really focused on that growing um their wealth i mean that's something i can have as part of a conversation

38:00

but yeah i might be getting too too hung up a little bit on the details of the question here but i think that

38:06

definitely you want to have that income experience conversation and then

38:11

when when you have that person who doesn't have much portfolio need then you can talk about giving and

38:17

you know even the guard rails keeping on track for a giving plan so that their estate balance doesn't get

38:22

uh so large unless that's what they want but i find that you know many people would rather give while they're here and

38:28

alive and able to to experience that than just accumulate a massive estate

38:34

and what i've often seen i don't know if derek in your experience if you've seen if you have seen this as well so for

38:40

that situation where or a substantial amount of your um of your desired spending or or kind of

38:48

your your retirement um lifestyle can be funded by non-portfolio

38:53

um cash flow so security pensions and so on what i will often see is those

38:59

the guard rails when expressed in dollar terms um will be

39:05

they'll look a little more friendly than if it were all portfolio so you you may

39:11

see that oh wow it would actually take quite a reduction in my portfolio for me to need to reduce my

39:17

income and therefore my portfolio withdrawals the reason being that well the portfolio

39:23

is not doing the heavy lifting right so it's sort of you've always got these other income sources and so and that

39:29

would be reflected when using holistic risk guardrails um

39:34

essentially uh you would see it happen here in the kind of client communication what are

39:40

the dollar amounts but you know one reason for it is also um you know the risk curve right the the concept of what

39:47

you know how risk would change over time for that for that household is very different than somebody who's funding all of their

39:54

um lifestyle from from portfolio withdrawals and then i've also seen vice versa that i mean in this case the the

40:01

income increase plan is quite close all it takes is a five percent increase in this case but um i i believe i've also

40:07

seen that that you know the upward adjustments might be a little more accessible a little more likely um

40:14

when you're not depending so heavily on on portfolio basically because sequence of return risk is just not as high for

40:20

that for that couple right next question is do the guard rails

40:26

float as conditions change in an implemented plan or once a plane is implemented are the guard rules fixed

40:33

until the portfolio balances hit them so they they do change over time so what

40:39

what you've that the dollar amounts change over time the risk levels do not so imagine a

40:46

situation where you know you have a million dollar portfolio nothing else right um

40:53

and you're 65 years old and then imagine 10 years later you you've managed to still

40:59

keep a million-dollar portfolio but now your plan is much shorter so

41:06

just with that very simple example it would be intuitive that we wouldn't want the dollar-based guardrails to stay

41:12

exactly the same because um you know kind of like we saw with

41:17

uh with this example right things do change over time due to plan length so now they

41:22

wouldn't change drastically month to month or maybe even year to year but if we start looking at you know

41:28

five ten-year differences you would want them to kind of slowly slowly um uh creep in the right

41:34

direction right so in that situation um essentially the uh the income guard

41:41

rails would have been getting more and more attractive right so uh you

41:46

know 10 years later for this couple um i would expect that uh

41:52

that downward income adjustment trigger to be much lower right because now we're

41:57

funding a shorter expected lifetime and so um we wouldn't have the same dollar based trigger um

42:05

that being said i know derek you probably have some thoughts on this too i don't think it's dangerous at all to kind of

42:10

you know state a a kind of a rounded version of this guardrail and say hey you know this is sort of a short-term

42:15

expectation feel free to think about it and keep it in your head but we'll kind of update that over time

42:22

and i was actually going to make just that exact point in practice when i give um you know because for for most of my

42:28

clients um you know the kind of when i present the guardrails to them to me the software's still there i'm

42:34

still looking at the software but i'm you know it depends on the client but i'm generally not even necessarily sharing access to the the guardrails

42:41

there and so in my client's mind it probably is a pretty static right we delivered it they've got the guard rails

42:48

from our last meeting they know where those guardrails were at now if we hit a guardrail um you know some of those

42:53

things that are changing in the background they're just not seeing uh even though that's staying up to date and then when we go to do an annual plan

43:00

update or you know maybe we do hit a guardrail and we have to make some changes or we we thought we hit a guardrail but maybe

43:06

things have changed since then um then we'll have a conversation about updating that plan so i would say in my client's

43:13

mind i'm kind of rounding some of these numbers presenting some guardrails they probably view as

43:18

more fixed even though the software itself is keeping it dynamically updated basically giving the the best estimate

43:24

available at that point in time and next question is are the short-term

43:31

expectations of the income adjustment plan assuming a 100 success rate

43:40

so uh no they're they're definitely not they're always based on this this

43:45

concept of holistic risk and the risk guardrails can be set it it's a

43:52

it's a lot like coming up with uh with an investment

43:58

policy for uh for a household right so you know how are we invested you know when would we make changes when would we

44:03

rebalance and so on it's very similar for for income right we're finding kind of a comfortable balance between um the

44:11

ability and and desire to accept risk which in the income world is the risk of

44:16

a downward adjustment right it's not the risk of failure so we won't see the words failure and success in

44:23

in the software but so it's always about finding something that fits the client situation um and so even the adjustment

44:30

plan you could put those closer or farther away depending on what the client's preferences would be as

44:37

derek said in practice we we've usually seen that um client sign of uh you know risk aversion or loss

44:44

aversion um will lead them to desire something more like you see here where

44:50

the upside is closer the downside is farther away um you know we're not kind of splitting

44:55

the difference um but you can really you can tailor it to whatever the client's um you know

45:01

desires are there may be young clients who say hey i'd rather live a little now fine tell me if if you know the party

45:07

needs to stop um and they might want more income or vice versa you might have someone who says look i never want a

45:13

negative phone call from you please be very conservative um derek do you have thoughts there

45:18

no i i agree there and then just one additional note in terms of if you're ever wondering

45:24

where those um you know what those uh kind of guardrail thresholds are you can go into the

45:30

advanced settings um and you can see for that given strategy or whatever you have implemented for the client where those

45:36

risk levels are um because yeah the 100 success rate isn't

45:41

going to be the uh the nor i don't even on the most conservative justin do you know off the

45:47

top of your head yeah if you threshold the slider on the income setting all the way to the left

45:53

um that is what what we call a risk risk zero

45:58

um you know it's always estimated risk of course you know no one ever knows exactly what the risk is but it's risk

46:04

within the model and then so that means basically if if risk then is

46:10

basically below zero right if your current behavior is is uh more conservative than anything that the

46:16

model thinks is possible at some point uh the the income plan will be well you

46:21

know go ahead and return to zero right uh pull yourself back to that very very

46:27

risk-averse level um yeah and i think on the slider the highest income risk

46:34

is 40. so it's saying it's still not splitting the difference it's saying you know 40 chance of

46:40

that this is too much 60 chance that it's uh that that will get a an increase in the

46:46

future but as derek said you can always go in and fine-tune those things in the advanced settings

46:54

next question here is uh what instrument is best for assessing holistic risk

47:02

i'll give my kind of you know take on this i i'm not a huge fan of like risk tolerance

47:08

questionnaires personally i mean obviously they have you know some compliance reasons and

47:14

other reasons that they're still very popular but for me i think it's hard to beat just a good conversation and

47:20

actually having a conversation about these types of income adjustments so going to the long term experience

47:26

and saying you know would you what kind of which of these you could compare you know side by side a more

47:32

aggressive and a less less aggressive type strategy and you know which of these sounds more appealing to you and

47:37

having that conversation um to me i've just always found that an actual client conversation is far more

47:43

valuable than what numbers somebody gave themselves on a questionnaire or where they

47:49

put themselves so that's what i personally rely on is more using using the plan output to actually

47:56

have some of that conversation about risk rather than trying to assess risk from a questionnaire

48:06

don't know uh next question is uh given that

48:11

retirement planning is by nature long term and that the variables are generally not likely to substantially

48:18

change month to month wouldn't this approach fit better in a year to year review quarter to quarter perhaps than

48:24

monthly

48:30

so i think there's i'll adjust and weigh in too but i think there's two different ways to think about this again there's

48:35

the actual client uh implementation like i'm not i'm not giving my clients a month-to-month

48:41

update here's how your guardrail's changed in the past month that is much more of an annual update and review

48:47

unless something prompts it right if a client calls me and they they want to take a large distribution to buy an rv

48:52

or whatever it might be okay we'll go run you know how does that change your guard rails

48:57

but i'm not going to just say hey this past month here's how it changed

49:03

that automatic update for me is more a benefit as kind of a professional in in terms of

49:10

the you know it's automatically updating for me if i need to go in and see where a

49:15

client's plan is updated if i need to go in and you know put in that scenario where we take out an extra 200 000 from the

49:21

portfolio or whatever it might be i can quickly do that and the plan is updated and ready to go

49:27

and that's the value to me more than telling the client their guardrails have changed over the past month

49:33

yeah i would add um like this is a really practical question and i i agree with everything derek just

49:40

said the the software the income web software updates

49:46

uh plans that are set to be monitored we call that an implemented plan updates those monthly so pulls in new

49:52

account balances if you have data integrations you know moves everybody forward one month in

49:59

time right now we're one month closer to social security we're one month older everything is updated right um

50:05

but for an implemented plan where you're in retirement it is extremely unlikely

50:10

that in any given month there's anything to do right so that the monthly update is really just kind of making sure that

50:16

we're we're not you know the plan is not too far away from reality um so because

50:22

those guard rails as you can see in this case they take a a decent amount of shift in

50:28

your portfolio um it's unlikely that in any given month you would have um an

50:34

adjustment it even comes down to there's a setting in the software for um minimum

50:40

uh income change which is a purely practical setting that says how big

50:46

would a change need to be for it to be worthwhile administratively right

50:51

and so an example is for those implemented plans we're tracking inflation we're tracking how purchasing power has changed um and every month we

50:58

get a new cpi number um but you don't want to call all of your clients and and give them an extra five

51:03

dollars this month um so even that is just a practical um a

51:09

practical thing i think in terms of cadence um often people who are doing this kind of

51:14

dynamic planning are probably keeping a cadence similar to what you might have done before um

51:20

but the income lab software will make sure that the plan's always up to date and it will tap you on the shoulder if a

51:27

plan that you have implemented is calling for a change even an inflation adjustment it might say hey you know since your

51:33

last inflation adjustment purchasing power has gone down by you know 5.5 percent

51:39

your plan says okay at that point you would make an adjustment here's what the adjustment would be um so in practice i

51:45

wouldn't you know expect monthly um to to make uh

51:51

your your client communication monthly

51:57

uh to a two-part question in the chat um as it just relates directly to what

52:02

we're talking about with the guardrails uh so two-part question first question is what are some of the factors that are

52:08

taking into consideration in the total risk guardrails for clients um i.e you

52:13

know annual inflation mortality tables just historically portfolio return etc um

52:21

and then uh you know what type of software slash programming can handle the interplay of these factors

52:29

so all of the examples you've seen at the end of of this presentation are

52:34

based on the income lab software so income labs dynamic retirement income

52:40

planning is is all based on these holistic risk measures and

52:45

that takes into account portfolio balance asset allocation fees

52:51

legacy goal inflation plan spending changes so retirement

52:57

smile for example other cash flows the inflation treatment of those cash flows the timing of those cash flows mortality

53:05

adjustments for the two people in a in a couple

53:10

i try to think if there are other things there's a economic uh [Applause] factors that weigh in certain analyses

53:18

if you want it so all of that is updated monthly and put together to form this concept of of

53:25

holistic risk yeah about

53:31

six minutes left we have three more questions just to kind of give you a hit though um so the next question is with

53:37

clients having taxable tax deferred and tax-free roth accounts can the software help optimize getting the most tax

53:43

efficient annual income does it allow for client specific tax rates and allow for reflecting tax bases

53:50

on taxable accounts to help with netable taxable account spending

53:57

yeah there is a there's a whole section to the software that deals with taxes derek can you donate i was just gonna say if you go into the

54:04

tax center um yeah that'll that'll handle all of that um even the baseline plans can be taking those tax

54:11

rates and things into consideration um but the tax center also look at things like roth conversion strategies

54:17

automatically looks at kind of a nice big list of considerable

54:23

you you might want to think about and uh shows you kind of the optimum within there

54:29

um next question is uh say you want to pay off the mortgage over the first five years which would create more of a

54:35

retirement tomahawk rather than a hatchet what considerations should be taken into

54:40

account in that situation it seems that guardrails don't change significantly if withdrawals above and beyond proposed

54:47

income requirement um so you can definitely model those

54:53

situations um and it actually that that i would put those kind of into the

54:59

the what if or a b testing um realm so it's it's easy enough to say

55:05

well okay well actually derek had the example of you know what if i buy an rv you know how does that affect things so

55:10

it's easy to see um here okay well what if we you know

55:15

pay off our mortgage in the next five years how would sort of the rest of our spending be

55:21

affected by that versus you know maybe you have 10 years left on your mortgage or something you can easily do kind of 80 testing there um i would have to run

55:28

the actual examples to see how it affects guard rails but it definitely it should and we typically see that um

55:35

in a tomahawk situation where actually the the total withdrawals are

55:41

um or the total income in a sense right or total spending is higher and then

55:46

drops down because an expense like that goes away i generally do see the guard rails

55:51

change they may not change hugely um but maybe one or two percent in in a direction

55:57

and just one real quick thing to add to that is from a practical perspective you're

56:02

actually you are increasing the uh sequence of returns risk right if that's like portfolio income that's all coming at

56:09

one shorter period in time uh that's going to be part of the income or the the outcome which sometimes you don't

56:16

even see that impact so much in the guardrails uh it's just something to be aware of kind of behind the scenes as well

56:21

yeah you see the same thing with delaying social security right there there it's a little different because then social security's higher in the

56:27

future but but you will sometimes see that at interplay whereas if we're taking more withdrawals early on you

56:33

will see the real shift a bit um and uh this question is um do you

56:38

have any suggestions on applying this to a non-retainer client relationship

56:46

i'm not not entirely sure what's meant by the non-retained like does that mean like a one-time

56:52

plan ongoing relationship yeah like a non-ongoing um so

56:58

it is um i've done some project work um you know in cases like that i actually

57:05

did i mentioned before i don't i don't necessarily share online access with a lot of my clients just because i don't

57:10

think a lot of them are going to go in and do that but when i did like a one-time plan that actually was a case

57:15

where i did get them set up online so that they could see the guardrails changing over time they could continue to have some access

57:22

to that so that might be a consideration is it is difficult though i mean like a withdrawal rates driven guardrails

57:27

approach much easier for somebody to kind of self-manage even though there's all the limitations of that compared to

57:34

something like this where you really need the analytical tools to do it

57:40

one last one coming in uh and then we'll cause a lot there um is there a big age difference between spouses and the cash

57:46

flow um and the cash flow of some and the cash flow assumes social security

57:52

pension or annuity payments going beyond the reasonable life expectancy of the

57:57

older spouse does this mean that the planned portfolio withdraws could be lower than

58:02

is necessary after the elder's balance dies how would you explain the income sources in the cash flow graph to the

58:08

client yeah um so uh

58:14

behind the scenes when when you're getting these numbers the proposed income the guard rails and so on

58:19

the income lab system is taking into account that different mortality expectations

58:26

for the for the two spouses so and you would see that especially in these um you know

58:32

big age differences but really you'd see them even in in couples who are closer together in age so that is definitely a

58:39

a really important thing you know assuming that everyone really does make it to the end of the plan will

58:45

artificially increase the income that you think they can have or the spending you think they can have right so it's

58:50

really important to make that adjustment when you're coming up with these risk guard rails so in the example

58:56

um where there's maybe a 10 or 15 year difference um you know kind of behind the scenes in

59:01

the analytics um you know maybe somebody's 70 and the plan is uh you know

59:08

uh 25 or 30 years because the younger person you know is might be alive at that point well toward the end of the

59:14

plan whatever social security is due to that older individual is is probably having very little effect anymore right

59:20

or it's not assuming that that that income is still available we actually did a um

59:25

a webinar on mortality adjustments in um in dynamic

59:30

planning and we'll probably re uh reboot that um probably sometime this year uh probably

59:37

also with ce credit um so but in the meantime we do have that available on the website

59:45

well very congested as always thank you guys so much uh for another great webinar um and then for

59:51

our attendee still here we will send out an email um with the recording link as well and um

59:58

quick reminder that we have our next ce webinar on april 26th there's the link uh in the chat to register for that

1:00:04

webinar um and you also have that link in the follow-up email um for this recording link

1:00:09

outside that thank you all so much thank you for the great questions and great comments and we will look forward to

1:00:14

seeing you all on the next one have a wonderful day everyone