Using Economic Data to Inform Retirement Income Advice - December 2022

all right good morning everyone thanks for joining our webinar today uh we are

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excited to kick off in a few minutes here we will uh just give folks a chance to join uh before we kick off the

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looks like we still got a few more folks joining in

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there we go morning Derek good morning

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how you doing how are you guys good

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okay okay perfect okay all righty well thanks

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for joining uh the webinar today everyone we are looking forward uh to giving you guys another great topic uh

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by Justin and Derek um before I kick it over to them just want to go over a few things for our

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okay all right Justin Derek that's my Spiel I will uh turn it over to you guys

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okay thanks mackley thanks everybody uh thanks for coming so today's uh topic is

Topic Introduction

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uh using economic data in retirement income planning and um some of this came

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from there's a an article and on kids.com that I did almost a year ago now

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um so you may have you may have seen a little bit of this but I've updated a lot of the data um through uh kind of the end of

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November and I think it'll be kind of an interesting uh interesting case study of how things change over over a year I've

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also um included a little bit more on kind of practically speaking how you can use

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economic data um when doing retirement income planning when communicating with clients and I

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want to talk a little bit about how this actually plays out in practice in um

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in income Lab at the end because a lot of people uh last time we're kind of like okay this is really cool kind of um

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you know academic stuff but but what does it really mean so hopefully we'll spend a little bit more time on that

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um so I think when you when you talk about economic context um you know people people can often

Economic Data

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think about um you know using economic context when they're making investment decisions and

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I think we all know that that's like that's a very fraught thing to do right uh it's it would be very tempting to to

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think that we could find some economic indicator or some stock measure or something like that that

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would help us predict exactly you know what returns will be and so on um but the great thing about retirement

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income planning is um I've talked about this before it's a series of relatively small spends

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relatively small uh liabilities that that we experience over a long period of

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time so just think about it as you know putting gas in the car buying groceries you know maybe paying your property tax

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bill some are bigger than others but all are small compared to the overall amount that you'll have to spend in retirement

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um and because it plays out over such a long period of time longer term

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um you know kind of economic measures of like okay well you know what's the world like right now they actually have a fair

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amount of um explanatory power when doing retirement and complaining they're not

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perfect there is there is no uh there's no measure I've seen and I don't think there ever will be that will tell you

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you know this is what my client can spend I'm positive above it I'll never have to adjust it that's not a thing

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however I don't think that there's evidence that ignoring these things entirely is helpful either

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um so uh what we'll do is go over three examples at the beginning here of

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um a kind of longer term measures that can help that provide some information

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um both for retirement planning analytics but also for just communicating with clients about what

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they might want to expect in retirement um and then as I said we'll talk about

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um that communication piece and the you know okay what's this actually mean for tilting my income advice

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um you know up or down over time okay so let's dive into the examples

CAPE

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so the first is probably the most kind of well-known or most well studied uh

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which is price to earnings ratios or longer term price earnings ratio which I'll just call Cape

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um so that's cyclically adjusted PE um and that was kind of made famous

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um by Schiller but there's been a lot of work Michael kitsis did some work on it this has appeared in you know a few of

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the academic journals on kind of how this um this has an impact uh on retirement income planning

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so the first piece is kind of that shift from PE kind of current PE whether that's a you know whether earnings are

Explanation Power

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last quarter's earnings or projected this quarter's earnings um but as we extend kind of the window

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size for the earnings piece here um the explanatory power gets better so

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if I'm using you know just one quarters one quarter's earnings my explanatory

6:38

power measured by r squared here but it's just the higher the better basically um is very it's relatively low it's

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actually a little uh lower than that if I if I go down uh even further but as I

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get up to 10 years which is the classic Cape it's the one that you'll see um in pieces on whether we can kind of

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predict stock returns over over the the kind of medium term

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um you'll typically see a 10-year Cape but even as we extend it further to a 20-year Cape our explanatory power gets

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better and what I'm comparing here is okay how much explanatory power does Cape have

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um for sustainable withdrawal rates so I'm just using kind of a a classic

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um simplistic Persona of a retiree who's trying to fund 30 years of retirement with a 60 40

7:32

portfolio those of you who've heard um uh Derek and I talked before that

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that is you know that's not typically how people actually behave right I mean people have other income flows they they

7:43

change their spending over time and so on but this is a it's a reasonable simplification to kind of

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um you know study this kind of thing so what this is showing us is hey you

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actually there is a fair amount of explanatory power um for for this uh particular measure

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for retirement income planning that's based on systematic withdrawals from a portfolio

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um and B kind of the longer we term um we use the the more power we have

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here so um you know this isn't about kind of quick decisions okay something changed

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this this month so therefore Everything Has Changed it's really okay what's the what's kind of the environment that we

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just lived through after the last you know decade or two um that gives us information about

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um what we might be living through um in the future so this has uh you know an inverse

Inverse Relationship

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relationship is pretty well known so the higher Cape is um the lower my sustainable withdrawal

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rate the lower Cape is the higher my sustainable withdrawal rate the cool thing about that is and we've talked

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about this before other people have um what that actually tends to mean is that

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um you know in in periods of high Cape people have actually pretty healthy uh

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Investment Portfolio balances and so yeah they can they can take a lower withdrawal rate historically but it's

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off of a higher balance and then vice versa if Cape is really low that typically means people have experienced

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really bad returns recently um and so their portfolios will have a lower portfolio balance than than they

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might like but historically at least they've actually been able to afford to take more as a percentage of that lower

9:26

portfolio balance so which kind of you know does some work to bring those those kind of outly or edge cases you know

9:34

closer to the middle it doesn't make them equivalent but it does kind of ease the burden a little bit um for people

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who find themselves retiring in you know kind of the worst or best

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um you know kind of the peak or the trough of a of a market um so what I've done here is uh I've I've

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put 20-year Cape uh in here and and um you know typically again you will see

9:57

10-year cap used in in uh in in a lot of Publications but it's

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interesting what's happened just over the last year so if we compare kind of the end of 2021 to the end of November

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so almost end of 2022 20-year cape has gone from you know almost its peak ever

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um so this the last Peak was in you know just before the tech bubble

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um down to you know certainly not uh not average um but but down significantly there's

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another thing to keep in mind when you're looking at Cape um which is that earnings number

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and that hasn't necessarily been measured the same over the last 150 years so there are arguments that yeah

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okay it looks like cape has been elevated since you know the 90s um and maybe it has been but it's also

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possible that changes in how we measure earnings um have affected this so so maybe this elevation is is a little bit of a kind

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of an artifact um so I I think this is a reason that people are sometimes a little wary on

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you know allowing Cape to totally drive your your decisions in retirement and

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complaining I think that's that's a a fair warning um but even so I think we've seen not

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not surprisingly that over the last year this cape number has has come down you know quite a bit from that from that

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Peak that looked like a kind of a scary Peak um the thing about Cape though is it's

Nest Egg

11:27

really most useful for um retirement plans that are heavily dependent on stocks right I mean it

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basically is a stock indicator it's a it's a an indicator of of stock evaluations our our stocks expensive or

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are they cheap um and again not not every retirement

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plan relies heavily on stocks people may often you know have more balanced portfolios or even a bond heavy

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portfolio they they may have um you know mixes of income that don't even include portfolios

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um so there's another measure that um that I introduced in that kitsis

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article and I think is really useful I call it the nest egg so and really what this is doing is it's measuring the

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sequence of returns that we've just lived through but I think rather than kind of focusing on it as a mathematical

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concept I like to think of it more as a story so if I had saved systematically

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um over the over my um you know working years and again we could look at different different

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numbers of working years kind of like with cape we we said well you know how long of a window do we look at here well

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if we look at you know how long my savings period could have been I can go

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you know 5 10 15 20. well it looks like if I look at kind of 30 35 years of

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savings which actually for a lot of people matches their savings period And

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I did you know systematic investing adjusted for inflation right exactly the

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opposite of systematic uh withdrawals during that period I can measure how

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much my Nest Egg would have been worth um had I just completed let's say 35

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years of of savings um and if I do that I get the blue line here which when I

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compare it to the red line which is sustainable withdrawal so this is in the past so I know what somebody could have

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afforded to withdraw in terms of withdraw in terms of a withdrawal rate I get this really nice kind of butterfly

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pattern right so that's an again an inverse relationship you don't have to focus on the exact values here just

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focus on the fact that they're a mirror image of each other essentially so this has a correlation if I recall of

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um around negative negative eight negative point eight or I think between negative 0.8 and 0.9

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um so a really strong correlation between these things which is really just saying hey if you've lived through

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a sequence of returns um that was really strong you're more

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likely to have a sequence of returns that's really weak or if you've just lived through a sequence of returns that was really weak you're more likely to

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live through a sequence of returns that that's really strong and actually in the middle it's the same right if you live

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through kind of a medium-ish sequence of returns you're likely to continue that which is why kind of in the middle we we

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get them very close to each other um so the nice thing about this measure is you can use it to measure kind of any

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portfolio it could be a bond portfolio stock portfolio a blended portfolio and so on

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um and again I mentioned that the the power of the nest egg measure gets a lot

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stronger as we go toward longer periods so again we're above kind of 30 years or really even above 20 years you're

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looking at strong explanatory power and again there's

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really been quite a change in um in the nest egg measure since the end

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of last year and it was interesting kind of on that point of okay is Cape Maybe not the best measurement because of

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changes in accounting rules and how you know earnings are measured um even at the end of 2021

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um this measure Nest Egg was it was elevated compared to historical averages

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but but not as much as Cape not nearly as much so so I think that adds a little

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bit of a um some Credence to this idea that maybe maybe Cape is artificially elevated but even you know compared to

15:36

the end of 2021 we've come down a lot um to 2020 end of 2022 right again not

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surprising given the the 2022 that we've had so um we were

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um you know above the historical mean at the end of 2021 we're not quite one standard deviation above uh so you know

15:55

0.73 above um so certainly above you know even you know pretty pretty high

16:01

above but you can see nothing compared to what we were in kind of the tech bubble times of the of 2000.

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um now we're actually below the historical mean um this this measure is below the historical mean so I think what that

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potentially does is gives us a little bit of Hope um certainly does it's it's never calling you know sort of the bottom of a

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market or anything like that but um but what we do see if we think that there's kind of reversion to the mean of

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these experiences people could have um it's saying okay well we've we've we've we've definitely absorbed you know

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we've gotten rid of a lot of our above average now we're actually slightly below the historical mean in this in this measure

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um and all of these numbers are just 60 40 portfolios so you know depending on the portfolio things would be uh

16:45

potentially a little bit different okay and the last uh measure is

Inflation

16:50

inflation so I you know this is obviously a big topic um right now and uh and this is one

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where what we find again is that short-term inflation so if I just looked at you

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know the the rate of inflation since last year uh is almost useless in

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um in helping us you know kind of explain or or um you know tilt our income advice

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um so kind of like with stock returns you know um current p e is not all that helpful

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current inflation isn't either and the main reason for that is we've had periods historically of of high

17:33

inflation that have only lasted a year or maybe two years um in fact in the post-war period I

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think it was uh 47 and 51 there were spikes of inflation up to 20 that quickly went down

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um now there have been others that have lasted a long time like in the 70s and early 80s right and so because of that

17:53

kind of that short-term inflation is not all that helpful however longer term inflation does have reasonable

17:58

explanatory power you can see here as that window of kind of okay what's the average inflation that I've been living

18:04

through over the last 10 20 years again you see this starts to this starts to have something to say for us

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unlike cape so stock valuations or Nest Egg which is measuring you know my my

18:18

recent market experience those are inverse relationships so higher Nest Egg lower withdrawals higher Cape lower

18:25

withdrawals low Nest Egg High withdrawals locate High withdrawals here we have a a direct correlation so if

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you've been living through a period of low inflation um that tends to mean

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um lower withdrawals will be possible if you've been living through a period of high inflation that tends to mean higher

18:44

withdrawals are possible and the reason for that that can be a little counter-intuitive right um the reason for that is if you've had

18:50

a really long period of high inflation there is kind of a reversion to the mean effect in inflation and so it's sort of

18:57

saying well look this can only last so much longer maybe we'll have interest rates coming down inflation coming down

19:04

and so that will support a higher withdrawal rate and historically that that has been true so here we see for

19:11

example you know the post-war period we had uh these you're never going to see one of these at you know 20 or something

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because it's a it's a long period of um of averaging but in the post-war period

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we had higher withdrawals and higher inflation in the early 80s we had higher withdrawals and higher inflation we know

19:29

in retrospect right at the time uh that would have uh it would have felt pretty bad and in the in the mid 60s we had low

19:36

inflation and low withdrawals uh that's actually the you know the period they gave us the the four percent rule so

19:43

again this is kind of a um if we have sort of a longer view right and we're not sort of looking at

19:50

the last last month's CPI print every every time um there is actually something to be

19:57

said here about retirement income planning

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um and since probably a lot of uh us are curious this kind of longer term inflation average is still really low

20:09

um currently um because we just you know we had such low inflation between the financial

20:15

crisis and now it's certainly been high over the last year plus but that hasn't been enough to drive that that average

20:21

um uh up yet okay

Takeaways

20:27

all right so takeaways from this are um longer visions and versions of

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economic measures tend to have more explanatory power they can help us more in retirement and

20:40

planning and this is I think it's just it's part of this great thing about retirement income planning which is things unfold slowly and that what that

20:48

does is actually gives advisors the ability to deliver a lot of value because they're really your advice on

20:55

adjustments um really is is really valuable and you kind of have time to to do the analysis

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obviously income lab software is is meant to help you do that but um this isn't about kind of really

21:08

short-term adjustments or or making quick calls

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um the other takeaway here I think is that these indicators have have really changed since the end of 2021 so

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um they've gone from you know on the cape and Nest Egg side being really

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elevated to being you know closer to kind of average um or maybe even below average in the

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case of in the case of Nest Egg so maybe a little glimmer of hope there for uh

21:36

for retirees or depending on uh portfolio withdrawals

Enrich client communication

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okay so how can we actually use this economic context to talk with clients um

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I think the the first here is probably the the most important

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um which is just enriching client communication helping clients understand that you know different different

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economic environments tend to offer different kinds of retirement experiences and first just just showing

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them that that is the case which is probably intuitive to them and then saying hey we don't we of course cannot

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know exactly what you're about to live through but you know given what we do know this this

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looks more likely than you know something else um the second thing you can do is actually use economic and context to

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tilt your advice up or down depending on whether income risk is estimated to be high or low and so we'll talk about both

22:34

of these now um so let's imagine for example you have

Historical context chart

22:39

a client who is really dependent on portfolio withdrawals um you can use uh a a chart which is

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kind of a historical context chart that says hey this is we we've given all the

22:54

history that we know we can actually measure how much someone could have

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spent from their portfolio if they had begun their retirement or been you know in your exact position uh at that time

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so this is a chart that um it's available on an income lab as well um that that shows exactly that right so

23:14

if you were invested in a particular way and then you were about to live through a sequence of returns you know let's say

23:19

starting in the mid 60s right kind of this classic four percent period or starting in the earlier mid 80s which

23:24

was a incredibly High uh withdrawal period this is what we know you could have

23:31

spent and still hit your you know your legacy goals or your specific spending goals and and so on

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um however you can see there's there's quite a range right you had periods uh kind of

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um you know in the in the 60s and 70s that were quite depressed you had periods in the 50s and 80s and 20s that

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were really high so you know where where do you land right so we can show here

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you know the green line is is proposed income um this is annual uh in income lab

24:04

everything is is usually monthly but um okay so let's say you know these folks are spending that the plan calls

24:10

for forty five thousand dollars um in withdrawals every year you can you can say well look

24:17

um historically there's been a real range in how much uh an Investment Portfolio could support in withdrawals

24:24

but if we kind of filter out the blue stuff right which were times that just

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weren't as much like today right in economic terms maybe maybe Cape was

24:36

really low right maybe Nest Egg was really low maybe inflation was was a long-term inflation was really high then

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we we find ourselves with the red periods and as you can see this is why you know we're we're proposing forty

24:50

five thousand dollars an annual withdrawals and not you know 80 000 or

24:55

something right or even 60. right now there have been a few times in the past

25:01

where we would have had to make some some downward adjustments over time to keep you on track but you can see this

25:08

45 000 level it was sustainable in in almost every historical period And in

25:14

the periods where it wasn't it was only slightly above so we think this is kind of a prudent place for you to start

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we'll be on the lookout for um the need for downward adjustments but also so we'll be on the lookout for

25:26

Upward adjustments because as you can see you know there were periods where actually a higher income level was

25:32

sustainable so we'll want to let you know if there's good news as well

Historical context chart example

25:37

um the the great thing about economic context and about these these kind of historical context graphs is uh you can

25:45

produce different ones depending on the client's situation so what we just saw was was just portfolio withdrawals but

25:51

again that's not usually what makes up a person's whole retirement picture so I'm

25:57

showing here is actually uh someone who is only depending on a

26:02

sixty thousand dollar a year pension so no no Investments um but this pension is not adjusted for

26:08

inflation so you're probably not going to recommend that they spend sixty thousand

26:14

dollars a year because they won't be able to keep up with with inflation um and so the question is really all

26:20

right how much of that sixty thousand should I start out spending and how much should I start out Saving right maybe

26:26

I'm saving fifteen thousand a year in the first year and then as inflation goes up I'll

26:32

save a little less a little less a little less I'm saving that into a an Investment Portfolio at some point I'll

26:37

start spending sixty thousand and then I'll actually start tapping that Investment Portfolio as well totally

26:42

different decision it feels like right um compared to the how much should I

26:48

withdraw from my portfolio but actually um it's it's very it's a very similar process so we can look at history and

26:55

say all right in times when inflation looked like it looks today how much could someone have spent from this sixty

27:02

thousand dollar a year nominal cash flow and how much would they have had to save and so let's say you are proposing

27:09

thirty five thousand dollars in real spending from this that's probably going to feel crazy to someone hey you know

27:15

I'm getting sixty thousand how could I why do I have to save so much um well this gives you a feel for hey

27:21

look um this is a level that we we know was sustainable in in periods that we're

27:28

like today um except for in the in the 60s and early 70s so you know we could go lower

27:33

and and cover ourselves for you know 1970s level stagflation right but what

27:39

we're proposing here is something that we think um you know it may require some downward adjustments but it's it's sort of a

27:45

prudent level at least compared to history so

27:51

um another way to use these kind of historical context graphs is to is to dive into actual events right so maybe

27:57

somebody's interested in you know the Great Depression or the the crash of of 1929 and you can say well look this is

28:04

we know exactly what the experience was since that point to take the crash of 29 and we know what

28:11

someone could have spent if they were about to experience the sequence of returns and sequence of inflation that that happened after that and you know

28:18

here's your proposed income level let's compare it right so in this case um the proposed income level a little

28:24

under 15 000 a month in this case is below what someone we know could have

28:30

could have spent in 1929 could the future be different than this could it be worse than the past of course of

28:35

course um but what we're doing is kind of connecting the income proposal to

28:42

um you know something that we know happened and something that's a a sort of memorable um for clients which I think connecting

28:49

things more to us to a story to to a real event for some clients

28:55

um can be more understandable than kind of just statistics um you know like a probability of

29:00

success or even an income lab a you know above plan below plan kind of number

29:07

okay so let's uh shift finally here to um tilting retirement income advice so

tilting retirement income advice

29:14

we just talked again about how to talk with clients using historical context and economic context but

29:19

um you know is there a way to actually um allow this to have an influence on the

29:25

advice um that we're giving people so uh there definitely is and I think

Risk return tradeoff

29:31

that the one way to visualize this is just to think about the the risk return

29:37

trade-off in retirement planning so instead of kind of you know Returns

29:42

versus standard deviation or something like that if you're used to thinking about you know the efficient Frontier in

29:49

in portfolio construction if we think about retirement income planning

29:54

um it's always possible to have higher income in retirement right higher spending you just have to accept higher

30:00

risk right which is the risk you'll have to reduce uh spending at some point in the future it's always possible to have

30:06

lower risk uh you just have to lower your spending right lower income and so this is just a this is just a trade-off

30:12

and different people will find themselves more comfortable on different parts of the of this curve of this this

30:18

um this range of possibilities um and in fact uh in income lab the

30:24

income setting slider is exactly this so if you if you move it left or the conservative side you're just you're

30:30

moving down on the risk down on the spending if you move up on the income uh you're moving to higher risk and higher

30:36

spending and then you're able to explore um what that uh what that looks like so

30:42

um you know we sometimes talk about like you know if a client if you ask a client well you know how much do you want in

30:48

retirement it's not uncommon for people to say well how much can I have um and so this is kind of answering that

30:55

question for you um how much can you have well it depends on your your sort of risk tolerance once

31:00

I once I uh Peg down your risk tolerance I can tell you how much you can have and

Risk curves

31:05

we could look at this in a curve um so for example um in this case you know if if I said

31:13

I'm comfortable with a with a risk level of 20 which is equivalent to uh a

31:19

probability of success of 80 right so it's a probability of failure of 20 or a probability of adjust of downward adjustment of 20.

31:25

um okay these folks can spend about 52 000 a year maybe we want to be

31:32

more conservative go down to a ten okay they could spend 45 six uh maybe we want to go down even further to five right

31:38

okay they can spend uh forty thousand dollars 900 right so um this is sort of

31:43

imagine you were sort of guessing and checking in in a in a static uh planning

31:48

platform these would be the numbers that you'd get out so this is what this curve looks like I can always go to higher income but I'm gonna have to uh accept

31:55

higher risk okay so one way you can allow economic

Historical data

32:02

context to influence um spending advice is by using historical data to to build

32:12

you know these these risk curves or another way to think about it is use historical data as your model of the

32:17

world right it's the thing that you're using to measure risk to measure sequence of returns right and so on and

32:23

there are some a lot of advantages to this including that when you do that you kind of get for free the fact that you

32:30

know correlations between asset classes change over time um uh you know average return standard

32:38

deviations change over time that's not something you can capture in kind of a standard Monte Carlo

32:45

um so if we do this what we can do is kind of say all right let's filter out those periods that are not like today

32:52

right it's just like the chart we just saw um where I'm going to filter out you

32:57

know 1924 right the Roaring 20s when stocks were just going up every day I'm going

33:05

to filter out you know the mid 80s where things were were going to go great

33:10

um and just look at period let's say let's focus on Cape let's let's get rid of all

33:15

the low Cape periods right because I I don't know if you know cape has hit a bottom but I know it's

33:22

um it's not a super low K period historically right so let's just filter those out and for for 2022

33:30

you know this is what we would get the blue line which is all of history everything goes down when I do that

33:36

right which means that all right spending less of my portfolio at this period is could

33:42

be prudent if I think that cape has something to tell me let's look at what it would have looked like in 1982 though when Cape was really

33:49

low at that period you would have been filtering out High Cape periods right historically so it was these examples

33:55

I'm only using the history that was available at that point so in 1982 I'm only Looking Backward I'm not looking forward

34:01

okay and that's in that case um the blue line is all of history but if I filter out High Cape periods my

34:08

everything goes up meaning uh This what I can spend was was higher

34:14

um if I took Cape into account right at every risk level right so

34:19

um you're saying well look maybe maybe you do want a 80 probability of success or 20 risk as we call it

34:26

um that's fine but you're actually going to be able to spend more that's what uh uh you're you're seeing here

34:32

and in income lab this is if you're using economic context with a historical analysis type this is exactly what's

34:39

happening right so you will see the uh the amount of income somebody can have changing

Why we dont use historical data

34:46

um I think I want to dwell on this just for a second um so sometimes when you know people come to income lab and and we talk about

34:53

historical or economic context um which we actually don't talk about all that much because you don't even

34:58

have to use it but sometimes they think maybe there's sort of a um you know something built into the

35:05

software that says explicitly hey if Cape is 40 then spend this if Cape is

35:11

six then spend this there's not there is there's no explicit kind of you know

35:17

formula somewhere that says you know let's let's derive your proposed income

35:22

from economic you know indicators like a like a regression or something

35:28

um the reason we don't do that is as soon as you write down that formula you're wrong there's just uh there's no

35:34

way you're going to be correct doing something like that the other problem with it is is it doesn't acknowledge

35:40

that actually there's a curve that you can spend more you just have to accept more risk so we don't want a formula

35:45

that's been it's out exactly what you you can spend we want something that

35:50

always gives you options a range of options right that moving that income setting slider always gives you those

35:58

options um in fact I want to as we're talking

36:03

about that I'm just going to shift to to show you what that looks like so you

36:10

know for example you know here's a plan um where where our income setting slider is

36:18

is is at the middle you know let's say for these folks that's more than enough

36:24

um for them to spend right they have desired a monthly income of twelve thousand um well I can just get more conservative

36:32

so pull the income setting slider over

36:41

keeping all the the goals the same so same Legacy goal I believe this plan has

36:46

some some special spending goals as well okay so I knocked up a couple thousand

36:51

dollars in income I'm still way above our goal so there's other tweaks I I

36:57

probably would do in a plan like this but the key is that you're really just moving down that curve right

37:04

um on the other hand you know if I maybe it's somebody who just really feels they want to live now

37:09

and they're happy to pull back to a more moderate um place in the future

37:14

I can go all the way to the aggressive side right so now I'm back up to up to that

37:21

uh 20 range um if you're curious about where on that kind of risk

37:28

uh scale you are um

37:37

let's see here

37:43

you can see it in the in the power planning tab

37:48

so right now I'm at an estimated 40 risk right so a risk of 40. so the kind of

37:55

equivalent to a 60 probability of success go down here and now I'm at 20. so these are just five five point moves

38:02

right now I'm at an estimated zero risk always estimated right because uh we

38:07

know the the future will probably surprise us but okay let me go back to

38:16

there's one other place that um that historical context economic context can can really help and that's in

Capital Market Assumptions

38:24

developing Capital Market assumptions so I'm just going to close with this um I think Derek and I will probably do a

38:30

full presentation on it at some point um but we've talked about this before

Monte Carlo Assumptions

38:37

um that you know most software uses kind of a traditional Monte Carlo analysis which just uh has one set of Capital

38:44

Market assumptions for the entire plan whether that plan is 20 years 30 years 40 years 10 years it's the same Capital

38:51

Market assumptions the assumption is always that every year um has the same expected return and then

38:56

there's a variation around that return um that has a a lot of that assumption has

39:03

a lot of problems with it right not not the least of which is if you if you believe there's reason to assume you

39:09

know lower returns over the near term you are also assuming lower returns over the long term in that situation or vice

39:15

versa maybe you think that there's reason to assume higher returns in the near term well then you're going

39:20

to assume them for the whole plan so that's why there's been a kind of a renewed

39:26

interest recently um I've seen others talk about it as well uh in kind of a regime based uh Monte Carlo meaning you

39:33

can have some assumptions about what you think the near term could be like maybe higher inflation maybe lower real

39:40

returns things like that and then you also can have longer term assumptions right maybe those that's reversion to

39:45

the mean or you're just using you know pure historical averages for that period um and doing this

39:53

um really allows you to have economic context um play a role and there's there's good

39:59

evidence that that doing this gives you better kind of results in retirement

40:04

income planning um so when we produce our default

40:09

Capital Market assumptions for regime based um you're more than welcome to to state your own but if you're using our

40:16

defaults it's all purely formulaic so there's no kind of what's my opinion uh what's the opinion

40:22

of income lab built into this we use historical averages but the difference is for for our defaults for for

40:29

traditional Monte Carlo we use just you know historical averages we use 50-year averages

40:35

um but for regime based we look at we take all of history and then we remove periods that were least like today so

40:42

the blue stuff here and then we use we say okay the first 10 years from the rad periods we'll use for

40:49

our near term but the subsequent 20 years we will use for long term so now you can see you're getting kind of

40:55

sequence of return secrets of inflation assumptions that kind of better match periods that we're more like today were

41:01

those periods exactly like today no of course not they just we're just ignoring the periods that we

41:06

that are that are least like today and when we do that um and actually run a study that says

41:13

well what if someone you know used that process to create their Capital Market assumptions

41:19

um through all of history we can actually test whether the those the the the model of the world you get the the

41:25

risk measures the probability of success measures um we're good or not so think of this as

41:31

equivalent to um somebody uh you know predicting rain right a meteorologist predicting rain well it's it's not all

41:39

that common that they say there's 100 chance of rain it just certainly happens right um but you know if they're predicting 10

41:45

chance of rain uh and it rains a lot whenever they do that that's not a good prediction right uh whereas if they

41:52

predicted 90 and it rained a lot that is a really good prediction vice versa if they're predicting 90 chance of rain and

41:58

it doesn't rain most those times that's not a good prediction right uh they should have gone with the 10 for

42:04

example so that's that's very similar to what we're doing when when you're using a Monte Carlo for example and so Derek

42:12

and I've been doing some work on this this is kind of preliminary and we'll be getting a lot more out on that but what

Regime Based Monte Carlo

42:17

we do see is um that by including that kind of

42:22

economic context regime based Monte Carlo um you get a much stronger model of the

42:30

world so you get better results closer to reality using regime based Monte

42:36

Carlo and actually using historical as well not not quite as good but very similar compared to

42:42

um traditional Monte Carlo so what you're seeing here is something called a briar score the only thing to understand

42:47

is lower is better so zero would be no error you're you're either predicting 100 or zero and you're always right

42:54

um so um with probabilistic stuff like measure like predicting the weather you're never

43:00

gonna have a zero um Briar score but low is low is good and you can see we get essentially you

43:07

know 20 to 30 percent less error by using historical and regime based Monte

43:12

Carlo um and one reason for that is it's it's acknowledging um economic context so like I said this

43:18

is this is sort of like a teaser uh we'll be talking a lot more about this uh in the future but

43:24

um one thing we really see here is um if you're just using traditional Monte Carlo you're really kind of using

43:30

a machine to to predict or to to make um plans that is not the not the best

43:38

machine available um out there not the best uh you know weather predictor

43:44

so uh with that I know uh Derek is on here and uh maybe we'll get some

43:49

thoughts on kind of talking with clients about um about historical context and economic

43:56

context and I think for me you know a lot of what we've talked about here today in the behind the scenes the the numbers

Historical Context

44:03

the math that all really lies in the realm more of if we're Physicians kind

44:09

of the the doctor understanding EKG and what goes behind it and how to use it how to take numbers out of it

44:16

um so I think it's very important for planners to understand you know all these implications of economic context

44:21

and how do we how does that influence how much we can recommend a client should spend and how do we use tools to

44:27

get that best recommendation for our clients but at the end of the day a lot of how I'm actually using economic

44:35

context and talking to clients tends to be much much simpler right I'm not getting into

44:41

the weeds of how the guardrails are adjusted or anything like that more than maybe using I really like that

44:46

historical visual uh to show you know here are the periods that are more or

44:52

less like today and talking about in particular for many of my clients and the plans

Historical Visuals

44:57

that I run oftentimes I get that uh you know the the target spending level is even below

45:04

the recommended spending level so I also like to talk in terms of here's how

45:09

conservative kind of we're being with the spending level here so here's you know different amounts you could have spent across history here's what you

45:18

know is recommended here's how much you could spend here's what you told me your target was is often even lower than that

45:24

now that could vary based on the clients you tend to work with but for my clients it's often lower than that so I do like

45:29

to make that point of just you know this is pretty conservative by historical

45:34

um by historical measures and I think many people will look at that chart in

45:40

particular and think oh yeah actually wait a minute there's there's some bad times in here there's the you know the

45:45

Great Depression there's the world wars there's all these things that um you know might make today's

45:52

crisis of the day you know not seem like it's uh as big of a deal so I do think

45:57

that does help um this visual in particular is one I like to go to and point out the areas of

46:03

here are the times that we're more like today and here's why you know yes you could have spent much more in some of

46:09

these periods but they didn't really uh match today's circumstances very closely

46:16

yeah I think this is sort of in my mind the closest you know if you showed somebody hey you have a 75 probability

46:23

of success that puts their mind in a particular place of like hey can I get to a hundred

46:28

right it feels like you're incentivizing them something this is more of a like like painted

46:33

picture it probably doesn't work for every every client right I mean some people like graphs some people don't but you can at least say well look

46:40

um like you said the history does contain some pretty dark periods economically and historically

46:47

um and like you said if you happen to be proposing a plan where

46:53

um you know the proposed income is maybe at or below the worst of these periods you're not saying well therefore you

46:58

know there's no chance we'll ever we'll ever have to reduce our income but but you are saying what we're planning it

47:04

gives you a sense of how conservative the plan is that is not just well can I get this number to a hundred right which

47:10

is not always the right answer for people but it is saying well look we've planned for stagflation in the 70s in a

47:17

sense right because hey your proposed income would have would have handled that right you would have survived 1970s

47:23

stagflation well we're planning for a great depression level you know global economic slowdown um because this this

47:30

spending level would have survived that again does that mean the future will be exactly this of course not and and you

47:36

know I think most clients understand that but you're giving a like a really clear like uh example of why this plan

47:43

is you know where it is and um you know is set up to withstand

47:48

certain shocks or or problems right yeah and I think there's really something too

47:55

kind of making this less of a you know because you could report similar statistics you know that are just

48:01

numbers on a chart but here when you actually look through history and you see the world wars you see the different

48:07

historical events that are on there you can toggle on or off the recessions the different things that you can do

48:13

um to me just makes it much more tangible and frankly interesting piece

Recessions

48:19

of information on the client's plan for them to directly deal with so I do

48:24

really like um this chart in particular for talking about economic context and just how I

48:31

personally use the tools once we get into guardrails once we get into other stuff I'm not talking much about it it's

48:37

kind of when I'm showing this and initially setting the stage that I will touch touch on it a little bit more

48:44

foreign what Derek was talking about there so

48:51

um you know it's just a a fake client right so maybe maybe this so the green line is their

48:58

um you know they're they're kind of proposed budget um may or may not be accurate a lot of

49:04

people probably are under underestimating how much they might spend so that you know maybe this number could be a little higher but you can see

49:09

okay the green is way below kind of the worst periods in history um if you want to you can show you know

49:16

recessions there are lots of them um you can zoom in right so you could sort of say you know okay well there's a

49:21

lot of talk right now about kind of 1960s 1970s level um stagflation

49:28

um okay we can see uh one interesting thing about recessions is that there's really like almost no correlation to to

49:35

how much you can spend there have been so many recessions they tend to be relatively short um so I think uh recessions tend to be a

49:42

little bit of a red herring in um in talking about retirement income but you can you know share that with clients

49:48

um and you can see this actually exactly the situation where the the black line which is the proposed income actually

49:54

survived 1970s level stagflation um you know just fine there were

50:00

certainly a you know a couple spots right this is kind of where the four percent rule came from these periods in the mid to late 60s

50:06

um but but you can dive in and really focus on on those areas uh if you want

50:17

awesome well thanks so much guys um I we do have a few questions already in the Q a but for our attendees please

50:25

if you have any questions drop them in the Q a and we'll spend the last uh 10 minutes here or so um walking through

50:31

some of those answers um first two questions more kind of feedback um in the initial part of the

50:37

uh webinar Justin when you're talking about Kate um just a thought on uh you know can we include cape in the income

50:43

lab reports um and then we add another question on is there a way to add the historical

50:49

context chart to the principle reports and income lab yeah um so as for the first one we have some

50:57

uh pretty exciting features coming uh next year first quarter um

51:02

uh you'll probably see them in beta um maybe even in January but but I would

51:07

think almost certainly in February uh where you'll see some of some more um kind of understandable you know

51:14

digestible types of approaches to these kind of economic context uh issues so yeah stay tuned for those

51:20

um and as for the report um uh yes definitely we will we will be adding that back I know there were some

51:27

issues with just getting this disclosures and disclaimers right on it but we'll be putting that back

51:33

perfect um so next question here is um you know what do you say to clients who cite the four percent rule guidance five percent

51:39

or even the most recent Morning Star article that says you know below four percent rates um and then income lab you

51:46

know says it's higher I'd be happy to at least share yeah

51:52

the way I like to approach that is often to go to um and maybe uh Justin you could even

51:59

show the chart where you can see the actual cash flows for a given client's plan

52:06

um and the reason I like to do that we've talked about before that whole often for

52:11

many retirees the retirement distribution hatching which you're kind of seeing a version of here it's not

52:17

quite hatchet-like but you can see it's clearly not just a consistent portfolio

52:22

you know withdrawal all the way across retirement right this is real numbers so

52:28

it would just be a flat line if we were talking about the four percent or guiding cleaner guard rails or other

52:33

types of strategies so to me we can take a look at a chart like this and see

52:39

it just actually doesn't um that's not what we see oftentimes in a

52:45

client's plan and particularly for somebody who's uh deferring Social Security maybe that you know retiree

52:51

somebody's approaching retirement you might see much more of that blade of the hatchet than we even see in this

52:57

scenario where the distribution rate might fall from nine percent in early years down to one percent and Beyond

53:03

going on and then so for me um you know it just is much

53:10

what you're getting with income lab is a number that actually is realistic to the planned spending of the client whereas

53:16

something like a four percent rule or getting cleaner guard rails isn't accounting all the for all that

53:22

client-specific spending the client specific longevity assumptions you're

53:28

missing out on all of that so to me it's to go I like to use a visual like this particular one to just show here's why

53:34

your situation doesn't actually fit the four percent rule yeah I think uh

53:40

was it Einstein or is that somebody said like you should you should make everything as simple as possible but no

53:47

simpler right so if you're just focusing on portfolio withdrawals that's actually

53:53

too simple for most people right you've oversimplified um so for these folks you know all I

53:59

have here is two Social Securities and often there's there's a lot more to it

54:04

um and then I think these folks probably have some special spending yeah so they're doing some funding of grandkids

54:09

college and they're paying off a mortgage right so that's why you see as as Derek said I probably wouldn't buy

54:16

this Hatchet it looks a little a little uh you know funky uh but you know I I'm

54:21

you're developing a plan where the portfolio withdrawals are meant to to fit um their exact situation and a flat you

54:29

know withdraw exactly is enough from your portfolio forever would would not wouldn't match their goals here

54:36

I guess I I will add to that too I mean there is the scenario where somebody's out past age 70 so there's no uh Social

54:42

Security or other types of deferral there's no special circumstances in terms of goals for spending

54:49

um and so that would be a situation where it might match up closer to four percent rule but in that scenario we're

54:55

often already farther into somebody's life time than they normally would have been looking at the four percent rule

55:02

um and we're also in a scenario where income lab might recommend that you could take more because we're planning

55:08

for adjustment and something like the four percent rule assumes you're not going to adjust you're going to spend blindly going forward so that's another

55:16

it's a more it's a more fair comparison when you have that set of circumstances but I still think there's reasons why

55:22

that number would be higher than four percent for somebody who's in their 70s and spending yeah so often and the the

55:29

retirement smile might come into play there as well so that's kind of Shifting some of your spending to younger years

55:35

where you're more active so so there's a lot of reasons that you're you're you might not be have a four percent

55:40

withdrawal rate and uh just a reminder for our attendees

55:45

um you'll have a survey at the end of the webinar where you can put in your cfp ID um as well so we'll we'll check it out

55:51

all there um for you all um next question here is have you done any similar economic context research in

55:57

relation to other bonder Equity markets um curious if the U.S markets include a bit of uh survivorship fights

56:05

yeah it's a good question um I I don't we we have not I I don't know if

56:12

there's I wouldn't be surprised if there's at least sort of Cape type research out there for other markets I know Wade fow

56:19

did some research on on systematic withdrawal rates looking at um other countries

56:25

um I don't know Derek have you seen any yeah I was going to mention uh fou's research on International and obviously

56:32

I think it is a fair point that obviously the us we've seen higher um safe withdrawal rates than you might

56:39

have seen in other countries and I believe in his research some of that was even two percent or lower in some other

56:44

nations so I mean I think it's it's something you know being worth being mindful of

56:49

um at the same time some of those smaller I mean it's just uh anytime

56:55

you're talking about economic history right I mean there's all sorts of factors that go into why some of those are much lower much possibly higher U.S

57:03

kind of going through that historical period rising to a global kind of superpower in that that time I mean

57:09

that's that is something to be mindful of that yes maybe the maybe that doesn't

57:15

translate perfectly into the the future um but at the same time I'm also not

57:21

as far on the pessimistic side when you look at what what drove down some of the withdrawal rates in some of those

57:27

countries I don't know if that's something you also would want to plan for in terms of looking at the future but uh certainly an area where people

57:33

could disagree and that if you did feel like you didn't want to use the historical numbers using something like

57:39

Monte Carlo adjusting the Capital Market assumptions regime based Monte Carlo to better reflect your views might be a way

57:46

that you'd want to use that tool instead of relying so much on the historical

57:51

awesome and then uh last question I see here is um two-part question I'll answer

57:58

the first part but uh does the software utilize assumptions with fixed index annuities included um and then how do we

58:04

contact for more information as far as getting in touch with us um for more information at the uh survey as well at

58:10

the end of the webinar you can note um you'd like to schedule a demo or have a team member reach out and then I will

58:15

get someone in touch with you after the demo um but as far as the first question Justin Derek does the software utilize

58:22

assumptions with fixed index annuities included so there's no kind of explicit fixed

58:27

annuity uh um section in the software I do we have had more and more

58:33

um requests for annuity modeling so I think that's probably something that you'll see next year

58:39

um I that being said I know there are people who who do model fixed index annuities in in the software so if you

58:45

get in touch with our um onboarding through or our um you know support team they can show you how to

58:50

put those in that's right okay well coming up on our time again

58:57

Justin Derek thank you both so much for your time here um for our viewers thanks for joining

59:03

um again please fill out the survey at the end as soon as we close this webinar and our team will be in touch as well as

59:08

uh we'll grab your cfp ID and get that submitted for you as well um and then for everyone here happy

59:14

holidays and we'll look forward to seeing you all on the next one in the new year

59:19

thanks everybody take care everyone