The Retirement Distribution Hatchet: Beyond Withdrawal-Rate Guardrails - December 2021

good morning everyone thanks so much for joining we're just going to take a few minutes to let everyone get logged in

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before we kick off our webinar

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there's derrick make sure i get derek set up

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morning derek hello how you doing good

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good we can hear you okay so i think we're all set

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looks like we still got some more folks uh joining so i'll give it another minute

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all right well yeah good morning everyone thanks so much for joining us on our monthly

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uh income lab webinar here we are excited to um host this conversation around the

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retirement distribution hatchet uh many of you may have already read justin and

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derek's kids article that came out a few weeks ago we got a lot of great feedback so we figured we'd keep that

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conversation going um and kind of have a deeper conversation around that topic um

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as always i will host this meeting and i'll turn it to justin and derek who will run the presentation

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and then at the end we'll come back for a q a session so throughout the meeting uh the webinar if you have any questions

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you can just submit them through the q a section here um and keep track of that

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you'll also be able to vote up questions or like questions um to move them up in the queue and then

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we'll just kind of work through the queue near the um end of the webinar uh for our newcomers as well um we will

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record the webinar and send out the recording link afterwards as well um but if you would like to

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contact us to set up a demo to see the income lab platform you're more than welcome to email or contact contact us

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through our website and we will get a demo set up for you as well and for our income lab users uh you all are

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fantastic and great with all the questions so please keep them coming and we'll uh looking for it for a great

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conversation today um outside of that guys that's all i have i will turn it to

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justin and derek and kick this thing off all right thanks malcolm thanks

Overview

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everybody for uh for joining us as we get into the holidays here i know there's a lot of people scheduled so

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definitely appreciate uh taking some time out to talk about uh retirement income retirement income

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research um so we'll try to keep the presentation to about uh half an hour here

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i'll kind of run through some some slides um derek will comment as usual and then yeah we'll do q a at the end so

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um today we're talking about um how to actually do

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dynamic retirement income so how to handle adjustments of income through

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retirement and this is a topic that i mean there's actually decades of research on this both from practitioners

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and from academics and um you know what we do at income lab very much um you know builds on top of

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that work so i think you know you'll certainly see in here we'll point out some problems with

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kind of actually implementing and scaling ideas that are out there um but

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you know you should interpret that as uh you know we're standing on the shoulders of giants here um

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so there we go um

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and one thing with with kind of the what we'll think of as traditional although it hasn't been that long

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approaches to dynamic income is they're usually really um designed to to do research right to talk about

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the issues that come up when dealing with dynamic income um and they're not always um designed to deal with

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it you know actual idiosyncratic client situations and so that's one of the one of the things that we'll talk about

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today so the contrast between you know a simple income plan like you like the one

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you see here right just flat um income for the entire plan and all of

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that income coming from portfolio withdrawals this is a really great model of the world to use for research right

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it's like getting into the lab right and you just isolate the thing you want to look at

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unfortunately that's not actually how most client situations look so um

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the the the term that uh i think it was derek coined uh was the retirement

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distribution hatchet so often client situations might look more like this

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where there are several income streams many of them are not portfolio withdrawal

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related and they're not necessarily constant across an entire plan and so the amounts

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of portfolio withdrawals in particular that come along can vary drastically over time so you'll see here

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the uh you know very dark blue or black blob here um looks a bit like a hatchet

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right in fact it even has a really nice ergonomic handle on it because this plan

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has the uh retirement smile built in where where these folks are planning to to have higher cost of living early in

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retirement and have that slowly reduced through time and then come back up again at the end we'll talk about that

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um later now it actually turns out that even for a simple plan

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um applying you know some of the ideas in research

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can be actually still be problematic so um so we'll we'll touch on that as well

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um so digging into kind of what what sorts of and again quote unquote traditional approaches to dynamic income

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planning are out there um there are so many you know we're not going to list them and we're certainly not trying to pick on anybody so but i think we can we

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can view it as okay what are the triggers for adjustment and how are adjustments made

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so typically triggers for adjustments are things like is the portfolio balance up or down by

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some amount so you might see something that says for example hey if my portfolio balance is

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you know at least 50 percent higher in inflation-adjusted terms than it was when i started

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i'll get to take a pay raise um or it might say is the withdrawal rate too high or too low so maybe i'm

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taking 50 000 a year and i just keep doing that i divide 50 by whatever my portfolio balance is and

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that gives me my withdrawal rate if that gets too high i'll bump it down if it gets too low i'll bump my income up

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or we've seen a lot of people talk about uh what are sometimes called rmd methods or

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you know things that are more kind of actuarially based where it's just hey with the passage of time we're going to

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update our income to kind of try to match it to um are our age

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and then on the adjustment side when any of these triggers happens you might increase or decrease your income

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by a percentage or um to a different uh a different point like a withdrawal rate

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and so on there might be a floor or a ceiling on that so we've certainly seen that where it's maybe you know hey i'll

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never increase my income above um you know 10 or 20 more than i started

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with or below a certain amount although that can add risk if we if we limit how low our income can go or we've seen

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things like hey we'll you know we'll skip an inflation adjustment or we'll take not a full inflation adjustment so

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these are just some of the the approaches that you'll see out there to triggers and how adjustments

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are made and you can really see you know where this is coming from right you can see hey if

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my portfolio bounces up from where i started you know it feels like clearly risk has gone down compared to where i

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was and so i can afford an increase same with withdrawal rates right those seem to have an intuitive link to risk

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and so adjusting based on withdrawal rates can make a lot of sense skipping an inflation adjustment that's basically

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a way of reducing your real income in a way that might feel um

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you know almost like it didn't happen to a to a client right so you can really see where all these come from and there

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are very reasonable um you know research ideas to to approach

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um the issue that i mentioned is they don't scale really well um

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to all situations so again the benefits are um they can be or at least seem very

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easy to manage right just a few kind of parameters to watch i mentioned the intuitive link to risk

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and there's a lot of research so it's it's you know if you need a place to go to kind of try to understand these you know there's there's published uh work

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on it um the challenges are gonna be i'm gonna group these as the top two together so there's a certain amount of

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arbitrariness which to be fair it's it's it's hard to ever get rid of you know

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all arbitrariness but um there's a certain vibratory that can actually lead to

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um triggering adjustments in the wrong direction so by arbitrariness i mean like a lack of the link to the plan

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itself or to the goals of the plan itself um so although the parameters can seem like they make sense when you look

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at it in certain plan situations that can actually push you in the wrong direction and then like i mentioned the biggest is

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scaling to realistic client situations so let's deal with the first uh first

Simple Income Plan

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two problems here so the um kind of basic client situations so again let's

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look at this kind of simple income plan we're gonna you know step into the lab simplify things make a bunch of

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assumptions um let's say that i have a million dollar portfolio i'm planning to take 45 000 a

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year from it adjusted for inflation and i want to leave 250 000

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um at the end of 30 years let's also assume that you're getting five percent real returns

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every year right obviously this is not the kind of thing that happens in reality except for the period

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um in red here where we get negative one percent returns

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okay and there's three percent inflation in the background if we add um

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a rule an adjustment rule which is we're going to skip inflation adjustments

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following any year where there was a negative real return um so this is you know it's certainly

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something that that's fairly commonly discussed um this would be the outcome so we'd start

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with 45 000 in real income during that period that was the negative

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um we'd reduce our income year over year essentially by three percent a year because of inflation

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um and then we'd go back to positive returns and um and we'd be taking 33 000

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and change a year after that so the issue here is um

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we basically had nine years of unnecessary income reductions um so we ended up with 26 lower income for the

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last 11 years of the plan because of the uh inflation skipping rule

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you can see that because you know we ended up with over uh 500 000 in

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in final uh portfolio balance here which was more than twice our goal

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so the issue was you know after these initial ten ten years where um

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returns were five percent which was more than we needed um we actually could have afforded to

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increase our income not decrease it right so we were actually uh not just you know on track to hit our

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legacy goal um we were we were doing better than expected so the right thing

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to do might have been to increase income at the very least it would have been not to decrease income and so

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this this inflation skipping rule um

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it although it's intuitive it it didn't match the plan situation in the west so it wasn't tied to the plan parameters

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um it it kind of referenced an arbitrary measure as well which um you know in this case the reductions

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were three percent because that's what inflation was occasionally you'll see these sorts of rules say hey i'm just gonna take you know one percent less

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inflation or two percent less inflation so that can deal a bit with that but even then it's arbitrary right why is

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one or two percent the right reduction right why would that be the right amount to adjust

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the the issue you're going to see throughout this is you know this rule although it's intuitive it's easy to apply and so on it's static but the

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situation isn't right so really what would have solved this is keeping track along the way you know how are we doing

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are we you know is is our chances of hitting our goals are they getting better or worse and and adjusting income to match

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that now you might say well okay you're kind of picking on uh skipping an inflation

Withdrawal Rate Guard Rails

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adjustment there are more sophisticated approaches um fair enough so let's look at uh you

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know withdrawal rate guardrails again lots of great research on this and um and we're really building a lot on it

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so let's imagine for example that we're targeting um withdrawal rate of you know 4.7

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we'll reduce that if we ever hit a six percent withdrawal rate so if our portfolio

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balance has gone down enough that that income level is now six percent of the portfolio or we'll increase it if the

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withdrawal rate goes down to four percent meaning now we have more money so uh

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our withdrawal rate is lower now the advantage of this is we are going to be doing calculations every

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month every year whenever it is to track the progress and it's not linked to an arbitrary measure like like inflation um

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so this this seems to help things a lot but a problem with it is those

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those um withdrawal rate guard rails are themselves static so you're applying

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them dynamically meaning you're applying them over time but we don't know how to change them over time right they're six

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percent four percent however the risk of a given withdrawal rate changes over time as my plan length

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changes so um what you're seeing here is uh on the left axis is how plan length goes down

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as a 65 year old couple ages um keeping longevity risk the same so

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keeping the chances that they outlive that the same and as that plan length goes down

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the withdrawal rates that i could afford to take at any given risk level are going to go up right because i have to

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fund less time so if we're applying static

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um withdrawal rate guard rails in that situation um we're gonna run into trouble so for example here you you can

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kind of see the static guardrails uh in blue and red um probably should have flipped the colors

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here but um you'll see how although initially maybe the green line is what you're you're you're targeting here uh

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as sort of your your comfortable withdrawal rate comfortable risk rate um

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that line is is hitting your you know reduce income guard rail um by it looks

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like the late 70s here and so these static

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guard rails would actually counsel us to reduce income whereas in fact you know if your withdrawal rate

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followed that curve your risk hasn't changed at all um so it would be uh suggesting something that's

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that's sort of counterproductive in that case um

Retirement Smile

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this is you know kind of the main issue with um with applying

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dynamic income in you know through time uh with clients is

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that we really always need something that that gives us a realistic view of our risk at any given point in time so

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setting static rules and guardrails and things at the beginning of a retirement

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um is great but we just need to keep doing that through time and changing them

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so now we'll turn to the third problem which was you know scaling this not just through time but across

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you know an entire set of clients who might have lots of different situations

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um so and and really to more kind of realistic situation so i mentioned at the

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beginning the retirement smile this is based on work by david blanchett although there

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are lots of other people who have talked about this concept as well the concept that we tend to spend more

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earlier in our lives earlier in retirement when we're young probably healthy probably

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active in fact year over year you might actually see some increases early in retirement whereas then on an

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inflation-adjusted basis so for your um your kind of standard of living um that

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may start to go down as retirement proceeds and then toward the end of life you

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might see it tick up again now this has a lot of benefits one is if you plan

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this way you are likely matching a pattern of spending that people will actually see in their life

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um the other is that you know the difference between planning for the smile and planning for what we call flat

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or just inflation adjustments but the exact same purchasing power

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is pretty significant so almost 20 more income early in retirement when it's

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probably needed compared to planning for that flat that flat spending pattern

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so definitely some reasons to do this the problem though would be that applying static guard rails to this

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situation is going to be very difficult um so here let's say these folks wanted to target a

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5.7 um withdrawal rate it's a little higher than before because again we actually we

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know that they can probably afford to take more early on right because they're doing the smile they're going to decrease that seven

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percent they're going to increase it at 4.3 percent um let's imagine we go from point one to

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point two here um would this how would we apply our guard

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rails in this situation so if they if they followed this and their balance had gone from 3 million to 3.8 million

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um over this time so you know they've they've more than made up for their withdrawals

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they would be at a 3.9 percent withdrawal rate at 0.2 at the second circle here

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um does that mean they should increase their income or no it's hard to say because that that

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decrease in income was was planned along the way so now we would actually need a way to distinguish between kind of

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planned changes in spending um and those that and withdrawal rates

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whose change is due to something unexpected that does require an adjustment so

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although you know withdrawal rates seemed really intuitive and a great way to connect to risk

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when we have a smile they lose that connection to intuition and it's very hard to know what what the

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right action would be in this situation um maybe even clearer would be that example

Retirement Hatchet

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we started with with the retirement hatchet so here the planned changes in dollar

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amounts are significant right we're starting in this case with 67 000 a year

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in withdrawals um and then we're going down to 55 then 24

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and eventually all the way down to 10 000. this is also a situation where even at the beginning of retirement

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um it turns out that intuitions we have because of all the withdrawal rate um

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research through time we they're tough to rely on because in a situation like this it may be that

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someone's taking seven eight nine ten twelve percent of a portfolio

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early in retirement well that sounds crazy to those of us who are kind of anchored to you know the four percent

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rule or something but the reason that may be perfectly fine in a in a situation like this is that's that's not

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we're not planning to have that kind of withdrawal rate or those sorts of dollar withdrawals forever they're going to go

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down quite a bit in the future and so looking at the risk of the entire plan

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that actually may be a very reasonable rate but it's very difficult again for those of us who've kind of followed a

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lot of research that was in the lab kind of dealing with more simplified situations that only had

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withdrawal rates it's very difficult for us to feel comfortable with those kinds of you know eight nine

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ten percent withdrawal rates early on so this is where we we really need

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something that is more um scalable and that encompasses

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everything that goes into a plan at any given point in the plan so it's not just about the beginning of

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retirement so that's where we bring in this concept of income risk or what we think of as total

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risk or holistic risk and setting guard rails that trigger adjustments based on that

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um i think we'll we'll have derek talk a little bit about what this what this concept is um it's it's actually not as

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foreign as you might think but um we want something that takes into account what's your balance at any given point

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what's your allocation at any given point what are your fees and expenses legacy goals plan spending changes right

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so that that smile you know other cash flows um capital market assumptions everything

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needs to go into that because um at it as we move through time and across

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a set of client relationships those things will change and therefore you know kind of the points when you might

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want to make adjustments will change so if we have a measure that that links

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that puts everything together into one risk measure we can do that we can trigger adjustments whenever risk is higher than

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some threshold that's acceptable um we can trigger uh that would be a downward adjustment

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because risk is too high or we can trigger an increase in income whenever risk is essentially too low right there

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is a point at which it's built in suspenders you know we can we can actually go ahead and breathe a

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little you know loosen the belt uh and and so whenever risk is lower than some

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threshold we could um we could increase income and the adjustments could actually be risk level based as well so

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we could move to or toward a target risk level a risk level that we already know we're comfortable with

Risk Levels

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um just as an example and the way that you might be able to conceptualize risk

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in this way is um risk level on this in this chart is

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across the bottom so a zero percent risk would be the income level

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that we're estimating has no chance of needing a downward adjustment in the future um you know 50

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risk would be one where it's a coin flip whether it's going to need an adjustment down in the future

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and so on and so for any client situation

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any plan at any point in the plan there is one of these curves now it might be

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higher lower it might you know rotate a bit and so on but we can always think hey for every risk level there's an

24:15

income and so you can just build a uh a a dynamic income plan based on this so

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maybe we want to target income risk of 20 right that builds in a nice risk buffer but you know we're not kind of

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overly restricting income um and maybe if r if the risk of that income goes down to zero right we're

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estimating you'll never have to make an adjustment well maybe that's a little too low of risk we'll bump you back up to 20.

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um or maybe if the risk of that income level goes up to 60 right okay well now it's it's you know i'm more than 50

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confident this is this thing's going in the wrong direction then maybe we'll we'll decrease it so that's that's kind

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of the the way that we can pull all this together into one

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picture that can be applied through time and across a set of client relationships

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this actually goes a very long way to solving kind of the scalability of of dynamic income

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in in a practice um so derek i don't know if you want to um

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that's uh kind of the end of the presentation um if you want to talk a little bit about this in

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practice and also you know how it can be done yeah yeah so i i think for me

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one of the big advantages of guardrails is that that ability to communicate to clients in a way that matters so talking

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in dollars not talking in probability and percentage and all this other stuff that um i hope you know

25:42

today what justin's looking at the technical part of it is really about doing what's right for the client to

25:48

be able to um set these income levels themselves they're not necessarily the focal point

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um for actually working with the client and that's where guard rails are are great right it tells somebody how much

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they can spend a day um tells them you know where they would get an upward adjustment where they get a downward

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adjustment and what that adjustment would be and i think particularly thinking about you know the

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that fear anxiety that's always there what if what if the market tumbles and you know the client could know you know

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if the market falls 20 maybe their garden rail doesn't come until 30 so at least they know when that change is

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coming and knowing what that change is ahead of time because a lot of times it's not devastating it's not that

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they're you know their income is going to get cut in half um just because the market might have fallen significantly so

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to me that's the huge advantage of guardrails but because of that hatchet

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it really can't get to the um you know from uh if you're using just a withdrawal rate type approach

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it's really not that meaningful in real life to communicating real life income patterns um

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if you want to go back to slide justin actually and um you know i think

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another way again we're not big fans of probability of success but just to think

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about this because you could use risk guardrails historical returns monte carlo regime based monte carlo you can

27:11

use all sorts of different but i think maybe for advisors to kind of put this in the

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context of other tools they might use currently um you know you could think of the risk level you know at zero

27:24

being sort of similar to the 100 probability success in a monte carlo

27:29

and then you know obviously going down so just the inverse one minus the risk level

27:35

uh being the probability of success um or sorry the

27:40

did they say that yeah yeah one minus the risk level um and then you could think about you know i think in practice

27:45

would say advisors that aren't using guardrails they're just using monte carlo type software a lot of times what

27:52

they're doing is something like a guardrails approach just without formalizing it so they're saying well maybe i initially target i'm just

27:58

making up numbers not suggesting these should be the best but just numbers that i think advisors use maybe i initially targeted 95

28:05

probability of success if it goes up to 100 you know might encourage the client to spend more if it falls down to 70 we

28:12

might start talking about making some cuts really in a way that's a it's a guardrails framework but

28:18

you haven't captured the most important part which is actually putting it in dollar terms and communicating it and

28:24

instead we're focusing on the least important part which is the just behind the scenes technical details

28:30

that are abstract and don't mean much um for a client uh so

28:35

you know i think you know this um you know having this risk level and understanding it is important as an

28:41

advisor but that really should be behind the scenes and what we're doing with clients is communicating

28:47

in what matters and that's really where those spending adjustments occur what the current income level is i've been

28:53

really just talking in income because that's you know for people that have received a paycheck their whole life that's that's what they understand best

28:59

i think so um that's to me the real advantage

29:04

yeah that's a really good point so you know on the income platform you'll never see this chart right it's uh uh this is um

29:13

kind of talking about the conceptual framework for you know advisors to understand um

29:20

but with clients you know with this with these analytics you can always turn this into dollar terms and that's what the

29:26

platform does it'll give you these trigger points not as risk levels but as okay you know if if tomorrow your your

29:34

account went from you know two million dollars to you know 1.5 then we would

29:39

make x adjustment in your income that's yeah that's an amazing advantage of being able to talk at a level

29:46

that's you know i think i put it here the the right level of abstraction something where no where people don't

29:51

have to learn you know new statistical concepts or things in order to understand their plan

29:56

but can really say okay that that that's in a language i already used and understand

30:03

so i think we hit that exactly on half an hour so monthly do we have any questions

30:10

let me get off you yeah we do um actually if you want to go back to the

30:16

uh the last slide on the the holistic um guardrail slide with the curve

30:22

yep there we go um this one just came up as you're on there um they said they love the income risk

30:28

serve um they ask you know does or can income lab provide that actual curve for a client scenario i know you said right

30:35

now um we don't have that but is that something we can do um potentially in the future

30:42

i i mean i don't see why not uh i would i would definitely be careful about showing that sort of thing to clients

30:47

might go down a rabbit hole but uh yeah i mean in theory that's that's that's doable

30:54

um and then this uh first one um if we go back to the uh the realistic example

30:59

slide um the question is just you know is it really realistic to assume a decrease in

Is it Realistic

31:05

spending retirement smile as we plan um this advisor said they're they're not really saying that with their client

31:11

they're not seeing that kind of happen with their clients in retirement i think one thing that's really

31:18

important to think about and obviously i it might be true i don't know that that advisor's clients but

31:24

um thinking in terms of nominal versus real dollars i mean that is something that i

31:29

see often that you know even if um somebody might still be taking pay increases year to year but if they're

31:34

taking a one percent increase and they're you know and inflation's going up three percent obviously you're still

31:40

moving backwards in in real dollars um so i would say plan to what's

31:45

realistic for your clients if if it um if it isn't the case that your clients are taking that reduction

31:51

we do see this as pretty persistent across [Music] socioeconomic levels some of the early

31:58

research on this was really not necessarily the type of individual's advisors we're working with so less

32:04

affluent americans uh but it's been repeated and replicated even among um

32:10

more affluent americans that are typical i think it's not that not the best

32:15

evidence for it but i think it was jp morgan study where they looked at households one million to two million dollars um investable assets very much

32:23

more typical of who advisors are working with and we saw the same reduction in spending so i think the um

32:30

i think it's realistic to at least think about um but uh yeah be mindful of the difference

32:36

between nominal and real because it might not feel like somebody's income is even is going down even when it is

32:42

in still following uh the reduction levels you see here um and then also just

32:47

uh be mindful of what your clients are if you know for sure your clients don't want to reduce their spending and that's not

32:53

what they want to plan for then um you can make that decision to not do that

32:59

next question here is um so it says to set up income guard rails using other software that focuses on

33:06

monte carlo would an advisor use the dollar level at a certain monte carlo that they wanted to target on the higher

33:13

end and lower end yeah so um i actually have a kids

33:20

blog post that goes through that process of what you would do if you were trying to set up guard rails using traditional

33:26

monte carlo tools and yeah basically it's a lot of guess and check to find where those uh where you'd hit those

33:33

upper and lower guard rails what adjustment then would be needed right to get back to your your target

33:39

conceptually that's what you'd be doing it's just a very cumbersome process um to do with traditional tools uh because

33:46

it's it's a lot of guests in check thanks dear um see

33:52

waiting any other uh questions for our attendees on right now

33:59

give folks another minute to maybe submit a few more questions

34:10

there we go okay um

34:18

gotcha so uh this we have a user who's new to income lab and so the question here is in terms of the actual

34:24

conversation with the client what deliverables or presentations do you see advisors using especially with respect

34:31

to the hatchet so i'll speak from what

34:37

what i personally use and then let justin take it from what other income lab users that might might be

34:42

doing but personally uh for me when working with clients the focal point is really the guardrails

34:49

that's that's what i'm presenting i'm um there are some additional charts in

34:55

terms of looking at i think the historical chart that shows what people would spend over different time periods sometimes

35:01

that's something i like to show just to put in context of you know what could happen i like to

35:07

report you know kind of that longer term income experience you know the percentage that's above or below plan

35:15

just so that i can help paint a picture and make sure we're using the right strategy right because we you know another thing that you can do

35:22

is you don't have to use one set of guardrails for every client obviously so you can use more aggressive or more conservative

35:29

guard rails so making sure we find that right income strategy to apply for clients

35:37

so with that those are supplemental you know pieces i'm bringing in i'm certainly you could show

35:43

somebody a picture of what their actual you know their income and projected uh spending would be

35:49

but i would say that's the hatchet um that's really more a point

35:54

that i'm talking more with advisors about just understanding the dynamics and how that relates to other guardrails

36:00

frameworks that many advisors might be using currently and some of the limitations there i don't really get

36:05

into that much with clients and talking about yeah your distribution rate might be 9 or 10 now but it's going to go down

36:12

and you can adjust um that's just not uh necessarily a conversation that i'm

36:17

commonly having and i'm much more focused on what you know justin just brought up here in terms of that income

36:23

adjustment plan and what the guardrails are um

36:29

yeah i would agree so there's both within the platform if you if you run meetings you know on a on a tv in your

36:36

office or you know meetings like this over the internet you can just use this part of the of the

36:42

of the dashboard the income and focus on the income adjustment plan how it relates to

36:48

you know balance or future projected balance um and then the way this is built is is

36:55

sort of you know you can peel back layers of the onion as as they're as they're needed this may be all you need

37:00

there's also um if you're running reports making pdfs there's a pdf that includes essentially

37:06

this information and then there's another pdf um that includes a combination of this information which is

37:14

you know higher level so it's saying okay great that's that's sort of my short-term view when when might i adjust

37:20

but help me understand what uh what up what a lifetime of following a dynamic plan could look like you know

37:26

are things looking positive negative how often can i see adjustments so there's a long-term income

37:32

outlook that combines this view which is kind of um you know how

37:38

over a lifetime what could income look like above plan or below plan but by the way

37:43

plan is that uh you know that that ski slope that you saw earlier of where

37:50

different different types of income come together to um give you what you need to spend

Income Adjustments

37:56

and then it combines it with this income adjustments piece which is think about this as more like the

38:01

cadence of phone calls or meetings with your advisor counseling

38:06

a change in income um obviously you know that you may have a some other

38:14

meeting schedule but this would be you know just estimating how often some some change might be made

38:20

and there are report modules you can use as well if you're sending out reports or printing

38:26

out reports and things just one quick clarification on that justin the um the the planned would be

38:33

the ski slope if you want to plan for the ski ski slope but if you're an advisor that doesn't want to do that you

38:38

don't have to do that that's a very good point yep yep this is this is not a requirement um you're more than welcome

38:45

to plan for um you know that flat income path you can build a custom one

38:53

for the question on you know i don't see my clients taking actual reductions in income this is what that smile pattern

38:59

looks like um in nominal terms and this uses uh

39:06

basically the spread between 30-year treasuries and 30-year tips as inflation so um you know

39:12

if inflation becomes higher than that then then you'd see even less of a reduction in income over time i mean

39:18

in this case it actually is going up over time right so 17 18. right this is monthly um so it's getting

39:24

up to 20 000 whereas it started you know at 16 000.

39:30

um next question is how do you take into account pre-tax roth and taxable accounts into the uh

39:37

guardrails here um

39:45

let me think about how that i i think the biggest thing that comes into play

39:50

with um with basically taxes of any sort right

39:57

so differences either in how much tax an account is going to trigger

40:03

or if you're doing roth conversions which obviously is triggering taxes and so on i think the biggest thing that

40:10

that comes into play there is increased sequence of return risk if your taxes are higher so this is another

40:17

hatchet example not maybe a much larger handle a much smaller blade um

40:24

anytime you this uh you know the the withdrawals are higher you have higher sequence of return risk

40:30

um so that's true you know if you have higher taxes as well so we've seen if you're doing aggressive roth

40:36

conversions or you know you just have more taxable income for some reason early in retirement you may see higher

40:42

sequence of return risk you would actually see that reflected though again in these dollar

Sequence of Return Risk

40:48

amounts which is great so if i was doing roth conversions

40:53

um there's a chance that this decrease trigger would be closer right so in this case i have to

40:59

my portfolio has to lose 21 percent for me to take a p paid decrease um but it

41:04

might be closer it might be 10 or 15 if i had more sequence of return risk the same is actually true um

41:12

it it just you know the size of that hatchet blade increases your sequence of return risk so there is for many people

41:18

you know taking social security later delaying it until 70 can be a good decision um this will actually show you

41:25

that that does increase sequence of return risk it might be a not very small amount and well worth it um but it does

41:32

allow you to to kind of see the effect of that and real quick just to

41:38

clarify it too on that another advantage of the holistic risk-based guardrails is

41:43

that you're actually going to be um you will be accounting for that so the the roth pre-tax you know taxable nature

41:51

of the investments that actually again in the underlying calculation along with all the messiness of any

41:56

client specific goals or cash flows um is all going to be captured and accounted for here whereas with a

42:04

traditional guardrails approach you withdrawal rate driven you miss that so that is that is all accounted for here

42:10

in terms of the nature of the different types of taxation of different accounts

42:16

um and the next one is uh can you bake in an assumption about decreasing real social security benefits for example

42:24

legislative risks and assuming social security ends up paying 74 of benefits

42:30

yeah it's been a more common question lately um so yeah that you you certainly can so um

42:38

on the platform there's a way to add other income that's where you would put pensions and and things like that

42:44

there's a place to um kind of do easy social security planning with with current you know benefit

42:51

levels and so on and assuming you know somehow we we sort that all out

42:56

you can just choose not to use that and instead you know put in a change in in uh social security benefits

43:04

and call it social security so that the taxation applies correctly um this next one i could actually answer

43:11

it's uh do you have any examples of communicating these strategies in your online video library um which actually

43:16

came up in our last webinar we don't currently have um a video of how an advisor would present

43:23

um the strategies are kind of communicate that to a client in a as a video tutorial but i know from our last

43:29

webinar that's something that we're looking at um and creating a few videos around how to actually have that

43:34

conversation and communicate with that client and then um from there uh

43:43

this question is um so curious to hear your thoughts on communicating to clients uh that later on they will be

43:49

taken 10 to 20 of their portfolio value after social security kicks in

43:55

how do you foresee that conversation going

44:01

i'm not sure i understand the the distribution rate should be falling

44:06

i'm interpreting that as distribution rate increasing is that i might be misinterpreting yeah i think maybe it's

Social Security

44:11

a mix-up yes i think um yeah so once social security kicks in

44:17

the district you know the withdrawal distribution rate should be decreasing um so i guess maybe just

44:24

kind of how how do we kind of foresee that conversation with maybe having helping a client understand that their

44:30

distribution rate may change just social security and maybe other cash flows um

44:35

yeah and i think it definitely comes up all the time in terms of clients feeling like well you know

44:40

should i really be pulling for my portfolio now should i turn on social security so that i don't have to um pull as much from my

44:47

my portfolio and um it is you know as justin mentioned there is sequence of return risk

44:54

considerations there but oftentimes just the you know the the increase you get from deferring social

45:00

security and the benefit that that has um i think 10 stout way um i also

45:05

totally kind of off topic of this but uh um jeff levitt jeff levine had a good

45:13

kisses article a few weeks ago or maybe it was last week on reframing that social security

45:18

conversation to be just a six month decision where they can retroactively continue to go back and make that

45:24

decision i think that's a good again not really income lab specific but just in terms of

45:30

having that conversation with clients and you know thinking about this isn't a you don't have to choose between 70 and

45:35

62. we can take it six months at a time you can always change your mind and go back um if you want to i think that's a

45:41

really good way for advisors to have that conversation and it gives you some

45:46

some ways to kind of combat that sequence of returns risk that is higher if you front load the distributions from the

45:52

portfolio um and then this next question is uh so

45:57

we have an advisor who has some clients who are spending all their are all rmd distributions plus other income sources

46:03

social security part-time income um these folks are older so the rmds are

46:08

not significant can this level of spending be modeled in income lab

46:16

yeah i mean that that's kind of that scalability across your client base is a key thing here so

46:23

um you know the examples we've used were uh still simplified still in the lab in the

46:30

sense that oh it's you know it's always a 65 year old couple or something but yeah it scales completely to other ages

46:35

so they could be 80 they could be 75 and you would get

46:41

you know different plan lengths and and different different guard rails and modeling and so on

46:47

i want to make sure as i'm reading the question um justin is there a way to say like if somebody wanted to indicate that

Spending

46:54

somebody was going to spend all their rmd and not save their rmd because i i think that might be what the question

47:00

was getting at is the spending level might be changing over time because somebody's just

47:06

spending all their rmd i actually encourage clients not to to look at it that way in terms of think

47:12

about how much do they want to spend and we'll work out that you know what to do with the monies that might come from the rmd that aren't needed but

47:18

um just just to make sure we answer that question i'm not sure yeah it looks like clarifying yes

47:24

spending all their harmonies okay so if um you know let's let's imagine that these

47:29

folks were um 72 or older um if this

47:35

uh full income level so this is monthly but so multiply that by 12

47:40

not something i can do easily in my head but um if that

47:45

and then those withdrawals 15 000 and change if if that's more than their rmds or you

47:51

know right at their rmd level then that will be the first thing that this system is saying you're spending right because

47:57

you got to take it either way um the same was actually true would be true of um

48:02

you know non-qualified deferred comp or um uh you know inherited iras or roth iras all

48:09

of that's going to happen no matter what as a sort of a tax thing right and then

48:15

whether you spend it or not really just depends on what your income level is and so anything that you're not using would

48:20

be rolled over into taxable accounts because well world over is the wrong word put into taxable accounts because

48:25

they can't be rolled over um and then uh next question here is

48:32

um this uh user is interested to know if you could combine the concepts of buckets so kind of the few examples they

48:39

gave for buckets being war chest bucket income bucket and growth bucket um and combine that concept with guardrails

48:46

and if so if yes um are they including the war chest balance in the overall portfolio figure for the

48:53

guard rails it's kind of two-part questions away though

48:58

yeah i i would say um i i do use guardrails and buckets both with my clients i use kind of a i like to use a

49:06

protection bucket and a growth bucket just kind of keep it simple i don't even break out the third cash bucket but

49:13

um i would say i use those both but for me the buckets are more of a communication uh type tool

49:20

michael kids has a nice article on basically using not necessarily using buckets as a

49:27

a way to solve for an income level or something like that but instead just helping kind of communicate so for my clients i like

49:34

to start with the guardrails and then when i talk about the portfolio i talk about it in terms of the buckets and

Wrap Up

49:40

quantifying you know here's looking at the actual distribution rate which i can get you know in terms of you

49:45

know how much are they pulling from the portfolio and how many years of um you know spending would that then

49:52

give them as really a way to build confidence and peace of mind when it comes to holding a substantial

49:58

allocation to stocks and retirement if i could say look you've got you know 30 years worth of spending here in the

50:04

protection bucket that that's how i'm personally using it but certainly i think you

50:10

it does work well to combine those strategies

50:16

i think um um let's see here that was

50:21

last question so far any last questions as we're about in the last 10 minutes here

50:29

before we wrap up give a few seconds for any last

50:35

questions to come in okay

50:42

all right guys well hey thank you guys so much um always appreciate the time you guys think to

50:49

write great content um really helping us learn more about income lab but also just about guard rails um and some of

50:55

the important features around dynamic retirement income planning and also just taking the time to answer

51:01

all these questions for our users as i mentioned we will send out the recording link afterwards

51:07

um so if you have any questions feel free to reach out to our team and we're more than happy to hop in a zoom call

51:12

or answer your questions over email for our newcomers again if you'd like to see a demo of the software feel free to

51:19

reach out to us through our website and we are more than happy to set that uh demo meeting up for you as well

51:25

um and happy holidays to everyone as we are in the holiday season um hope everyone can

51:32

take some time off and just relax and enjoy a little bit of the holiday season here and we'll um we'll be back next

51:38

month with our next webinar thanks everybody thank you so much everyone derek thank

51:44

you as well and you too justin we'll uh see you guys next time