one of the key questions you can answer

0:02

with income lab is given my resources

0:05

and other things in my my plan how much

0:08

can I spend and you get the answer to

0:11

that in the retirement paycheck or

0:13

spending capacity of a plan and you also

0:15

get information on when you would change

0:19

either up or down the amount of spending

0:21

those are the guard rails we often get

0:23

questions okay that's that's great but

0:27

how are you arriving at that number so

0:29

I'm going to go over that here and also

0:31

talk about how you can talk about that

0:33

with clients so how do we answer that

0:36

question how much can I spend well in

0:38

any kind of deep analysis of retirement

0:41

spending what we're really asking is

0:44

given the resources of the plan the

0:46

length of a plan um certain amounts of

0:49

planned spending given the assumptions

0:52

about how um returns could work

0:55

inflation can work and so on what can I

0:57

spend and in figuring that out we look

1:00

at a huge range of how the future could

1:03

work so you could have high returns low

1:06

returns High inflation low inflation and

1:08

so on and in each way that the future

1:11

could work there is an amount that you

1:13

could spend um and exactly hit your your

1:16

goals and if we stack those all up they

1:19

might look something like this so we'd

1:20

have some scenarios where you'd have to

1:23

spend very little to get through that

1:25

world in some scenarios you could spend

1:27

a ton and still get through that world

1:28

but in most of them you're kind of here

1:30

in the middle and if I asked you what's

1:32

the most likely amount that you can

1:34

spend the the best answer to that

1:36

question what can I spend you would say

1:38

it's this one the one right in the

1:41

middle that's the one where half the

1:43

time you could have spent more half the

1:46

time you could have spent less so it's

1:48

the the best

1:49

guess another way to think about this is

1:52

that that best guess is the dividing

1:56

point between the chances that you're

1:58

overspending and the chances that you're

1:59

under spending to the left of that

2:02

dividing line is the under spending Zone

2:04

it's the the spending capacity or the

2:08

retirement paycheck that is living

2:10

within your means anything to the right

2:13

is in the overspending zone it's where

2:15

you're living above your

2:17

means so I'd encourage you to adopt this

2:20

way of thinking about finding a spending

2:23

capacity or retirement paycheck you're

2:25

trying to balance the risk of

2:27

overspending of course that's the one

2:29

people worry about the most we don't

2:31

want to over tax our resources but

2:33

you're trying to balance that risk the

2:35

risk of overspending with the risk of

2:37

underspending typically that means

2:39

you're going to find an initial spending

2:42

capacity or retirement paycheck that's

2:44

within the under spending Zone hard far

2:47

within it will depend on the how much

2:51

the spending matches up with the what

2:54

the client wants to spend so if they

2:56

want to spend a ton you may have to um

2:59

creep up a little bit in the under

3:00

spending Zone and take on a little bit

3:02

more risk you're still in the under

3:04

spending Zone you're still living within

3:06

their means uh or if they if their

3:08

resources support a lot of spending and

3:11

they really don't need it you can go

3:12

further back in the under spending zone

3:15

so you might be able to choose a risk of

3:17

under spending of around 90% only a 10%

3:20

chance of overspending and that allows

3:22

things to get worse the risk of

3:24

overspending to go up the risk of

3:27

underspending to go down and they're

3:28

still in the UND spending Zone you can

3:31

find this overspending under spending

3:34

Concept in a plan on the main dashboard

3:36

so here we have a plan with you know two

3:39

and 3/4 million in portfolio plus Social

3:43

Security and lots of other resources and

3:44

ALT together we're at an $188,600 a

3:48

month retirement paycheck and you might

3:50

wonder where that comes from you can

3:52

just open these settings on the side go

3:54

down to income setting and you'll see

3:57

that here we're targeting an estimated

3:59

20% risk of overspending and at 80% risk

4:02

of underspending your risk of

4:04

underspending is well above 50% so

4:08

you're well within the underspending

4:09

zone and so this is kind of a moderate

4:12

setting you can see that you can be on

4:15

just these default income settings you

4:16

can be as high as a 99% risk of

4:20

underspending so only a 1% risk of

4:22

overspending extremely conservative but

4:24

that that works for some people or on

4:26

the default you can go as high as a 60%

4:28

risk of UND spending

4:30

um sorry as low has a 60% risk of under

4:33

spending and a 40% risk of overspending

4:35

so you're getting more aggressive the

4:37

other place you can see the effect of

4:39

that is in the guard rails so here again

4:43

if I ramp up my risk of

4:46

overspending and I can spend more um

4:49

that also means I'll have less space

4:53

between um now and having to potentially

4:56

take a pay cut and more space between

4:58

now and potentially taking pay raise

5:00

then for example if I was way on the

5:03

other side now I have I could go down

5:06

29% before taking a pay cut and have a

5:09

very small um difference before I take a

5:12

pay raise so that's just the trade-off

5:14

between my current risk of overspending

5:18

and underspending and where these guard

5:21

rails live so that's a an explanation of

5:24

where the retirement paycheck or

5:27

spending capacity comes from um where

5:29

ENT

5:30

helping you find a place where you have

5:33

the right mix of overspending and under

5:35

spending risk and for those of you who

5:37

have done the uh master classes in the

5:39

past you may remember that when we say

5:42

risk of underspending that is equivalent

5:44

to probability of success and we've

5:47

we've spent a lot of time talking about

5:49

why probability success is the wrong uh

5:51

measure for retirement plans um but if

5:55

you're wondering kind of what we're

5:56

talking about that's a you can do that

5:58

that translation in your head it's much

6:00

better thought of as uh balancing risk

6:03

of overspending and risk of

6:04

underspending so if a client is asking

6:07

well how did you get that number one way

6:10

to address that is to say our role is to

6:13

provide you with a retirement spending

6:15

level that is living within your means

6:18

uh and that means not overspending your

6:21

resources but we also don't want you to

6:22

be under spending and take on a high

6:25

risk of regret where someday in the

6:27

future you look back and say oh I wish I

6:29

had bet more so we're trying to balance

6:31

those two things and that's what this is

6:33

this we believe is uh within your means

6:36

but it's not massively underspending

6:39

your

6:40

resources the next question people often

6:42

have is okay great but why are these

6:45

guard rails what they are think about it

6:48

this way an upper guard rail is telling

6:50

you when it's time to spend more or at

6:52

least when you should feel comfortable

6:53

spending more when would that happen it

6:57

would happen when your risk of under

6:58

spending is too high it's just become

7:02

incredibly high and so in all of our

7:05

defaults um this guardrail is hit

7:08

whenever your risk of underspending hits

7:11

100% what about the lower guardrail

7:14

that's the one people tend to care more

7:15

about when would you take a pay cut it

7:17

would be when your risk of overspending

7:20

is too high and it's probably not going

7:22

to be you know a 51% chance of

7:25

overspending you need to be really sure

7:27

someone is overspending before before

7:29

you recommend a pay cut people don't

7:31

like to take pay cuts so on all our Vol

7:34

defaults this would be hit whenever your

7:37

risk of overspending is 75% or more you

7:42

can see

7:44

these levels in the advanced plan

7:47

settings if you go to income

7:51

settings I'll click customize just so

7:54

that you can see them and you can see

7:56

okay our upper guard rail is when a risk

7:59

of

7:59

under spending is 100% our lower guard

8:03

rail is when my risk of overspending is

8:06

75% you actually can customize these and

8:09

change where you want them to be you

8:11

know for example I can change my lower

8:13

guard rail to be at a risk of uh under

8:16

spending risk of 90% instead of

8:19

100% so to summarize the retirement

8:22

paycheck or spending capacity and the

8:24

guard rails all come from measuring the

8:27

risks of overspending or under spending

8:30

for a particular plan and these

8:33

are specific customized levels for the

8:36

particular plan you're looking at so

8:38

there are no rules of thumb built in

8:40

here they're using the actual plan with

8:42

its particular sequence of return risk

8:44

sequence of inflation Wiis risk

8:46

mortality risk longevity risk and coming

8:49

up with a retirement paycheck that is

8:52

living within someone's means but is

8:54

balancing the risk of overspending with

8:56

the risk of regret and the guard rails

8:59

are the levels at which your risk of

9:02

regret is getting too high in the case

9:04

of the upper guard rail and the risk of

9:06

overspending is getting too high in the

9:08

case of the lower guard rail and because

9:11

we're constantly measuring these risks

9:14

the guard rails will actually change

9:16

over time um in fact if you saw a plan

9:19

where the guard rails are not changing

9:22

that would be that would be strange uh

9:25

just think about you know if these are

9:26

the guard rails today in 10 years they

9:28

better be different uh at the very least

9:30

because these people will be 10 years

9:31

older so that's kind of the the the

9:34

magic of using overspending and

9:37

underspending risk to to manage the

9:40

retirement paycheck and the guard rails

9:42

is that you're always taking into

9:44

account whatever the risks are on the

9:46

ground at that point um so hopefully

9:49

that helps explain both um for advisers

9:52

with the analytics are behind it but

9:54

also giving you some language to use

9:56

with clients to explain where these

9:58

numbers come from