The Retirement Distribution Hatchet Webinar - September 2022

good morning everyone we will begin the webinar in a few minutes as we get our panelists and attendees in here

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okay warren and derek

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[Music]

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i'm okay i'm i'm in the right place right yep you're here just getting justin in here as well

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make sure you like join some nope you're good i was uh having some technical issues

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nope no problem all righty perfect okay

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morning justin fix the hair okay perfect okay and then let me see our

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attendees all right yeah it looks like we got the majority of folks in here

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okay good morning everyone uh thanks for joining our webinar this morning we are excited to kick off another great uh ce

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presentation uh for you today um by our panelists derek and justin before i turn it over to them for those

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of you who are joining for the first time we will have the first half of the webinar be the presentation and then

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we'll open it up for q a uh after that in the zoom meeting webinar here you'll

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see the q a tab at the bottom feel free to drop your questions in there you can also view other people's questions

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upvote and comment um move their questions up in the queue and then we'll kind of walk through the queue as well

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uh after this uh this webinar you will get a survey right after to um just put in your information as far as your cfpid

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and things like that so we can make sure you get credit um for your cfpce credit um for joining this webinar

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okay all right guys i will turn it over to you and come back for the q a

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all right thank you everybody for uh for attending

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um so today we're going to be talking about um risk and retirement and how to

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uh how to adjust for risk over time because it's very clear whether that's based on

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you know research or your own intuitions about your clients or people you know

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that retirees don't fail in retirement so they don't typically kind of

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you know run off the cliff while a coyote style uh and and run out of money

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instead they adjust um and this is really similar to how we might adjust in

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our working years um you know things are a little better than expected we take that nice vacation things are worse than

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expected um you know maybe we trim back a little bit um so this is very clear

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and before we kind of get into the the ways that people can adjust and you

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know ways to really scale this across client types and across time for the same client i want to just take a second

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to to talk about what this means for how we discuss retirement and retirement risk

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for clients um so and we often do this with with metaphors right so there's a lot of

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kinds of risks in the world some is catastrophic some is chronic some is small some is large um

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and unfortunately the the kind of dominant paradigm for discussing retirement and

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retirement risk right now is the success and failure paradigm right this kind of binary black and white you either

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succeed or you fail and a lot of people have talked about why this paradigm is is not adequate for

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for discussing retirement um however you will see people say things like you know well would you get on an airplane if it

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had a 10 chance of crashing if it only had a 90 chance of of

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of success um but that's really the wrong metaphor um for retirement

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uh retirement is very different than than flying a plane we might look

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for metaphors more in the realm of detours or fender benders or

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um you know traffic jams um maybe even uh you know if you want to stick with

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planes we might stick with uh delays or even um cancellations right things that

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are definitely annoying and depending on the situation even you know really a problem but definitely not the

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same as you know catastrophic failure the reason for that is that

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retirement has some really helpful characteristics i've said before that

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retirees have a superpower and it's based on the way that retirement lays itself out

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over time so from the financial standpoint at least the the liabilities of retirement are

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they're small they're small relative to the whole and they're spread out over time relatively smoothly

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that means that as things change in the world around us for a particular retiree

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we will see how risk is changing right so it will either be going up or going down or maybe

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staying the same but it will tend to move you know not all at once it won't go from hey everything was amazing

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you know we were under spending we were probably going to leave lots of extra money to our heirs and then the next day

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it's the opposite instead things move over time generally over

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months or maybe even years at the very worst over you know many weeks we might see hey things were

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really good now we're just normal again right um and the the great thing the superpower of

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this is we can both see how things are changing over time for retirees and we

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can make changes in advance to adjust for those so the liabilities themselves are often flexible

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so i've talked before about how this is very different from you know a

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a hedge fund or something maybe it's a highly leveraged hedge fund market to market um

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you know futures or securities and there you know you really could go

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from things are okay to you're out of business you know the next day or the next week

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that's not the way it typically happens with retirees

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so okay with that kind of groundwork in place what we would look for in an income

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adjustment kind of paradigm would would just be something that is

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tracking that risk and letting us know if risk is too low so to speak right

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allowing us to let clients know hey you you can afford to live a little right now maybe take that vacation you've been

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hoping to to do or you know uh you know do that home improvement project right

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you have some there's some slack for you you can take up here or is risk getting too high you know consider tightening

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the belts so that's kind of the the paradigm we're looking for a way to do that right

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um and ideally this would be a an approach to adjustments in

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retirement that are accurate so we want you know our analytics to give us

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adjustments in the right direction um that's first and foremost

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of the right size so to speak although that's a little bit um you know that that might depend on the on the client

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what the right size is and at the right time we want it to be scalable so we wanted

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to apply across all different client types you know different mixes of of income sources and so on and over time

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it should apply for a 60 year old a 70 year old and 80 year old right it should scale

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we want this to also give us something that we can communicate in an understandable way so

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that clients and advisors know what to expect right a way that you can really you know communicate this uh

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and and be understood and then we want it to be manageable right this this can't be something that uh

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that uh where now you can only have one client because it's so complex that uh that you're gonna need to

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um to spend all the time on the analytics there so um adjustment based planning and

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retirement is is is nothing new um in fact even in bill bengan's 1994 piece

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on what many people later called the four percent rule um he talked about adjusting um toward the end of that

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article so people have known that adjustments should be part of retirement for a very long time

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and there are lots of different approaches you can find in the academic literature and the practitioner

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literature on how you might go about it in kind of the nitty-gritty nuts and bolts of you know doing the calculations

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for figuring out when to suggest that your clients make adjustments

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and the the approach is that that i'll talk about today and one in

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particular you could kind of say are are built in this kind of mode of triggers or guard

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rails right so triggers might be something like is my portfolio balance up or down by a certain amount is my

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withdrawal rate too high or too low um or there are even cases where it simply

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has a certain amount of time passed it's time to update my withdrawal rate

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and then the adjustments once something is triggered once a guardrail is hit tend to be increase or decrease by

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something maybe there's a floor or a ceiling on a withdrawal rate or an amount

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or there are some cases where you might um see something like hey you know if our account balance is down by a certain

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amount skip the an inflation adjustment that kind of thing so triggers uh for adjustment and then the

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adjustments themselves um now a lot of these approaches

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have some some value to them particularly as research topics because they tend to strip away a lot of the

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complexity of typical client situations and um kind of give us an insight right

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into the analytics of it some of them seem fairly easy to manage for example skipping an inflation

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adjustment is is very simple we just do nothing they tend to have an intuitive link to

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risk which is uh definitely a virtue here and there's a lot of research on them but

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unfortunately um when you try to transfer them into

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you know the the messy world of client idiosyncrasies and things

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you can run into trouble so we'll see how these can even trigger adjustments in

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the wrong direction uh in certain times so but the main thing is it's really not easy to scale these across

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uh realistic client situations so we'll give an example here

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um so probably one of the the more well studied and definitely more widely

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adopted approaches to giving retirement income adjustment advice is

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to use withdrawal rates withdrawal rate guard rails lots of approaches to this as well

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but what this means is you're going to target a certain withdrawal from an investment portfolio

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and take systematic withdrawals so you're going to keep that that dollar amount withdrawal in

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in place um making inflation adjustments over time and then change that dollar amount only

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if something else happens okay so if i'm taking fifty thousand dollars from a million dollar portfolio

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that's a five percent withdrawal rate um if the you know portfolio balance goes

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up the withdrawal rate will go down if the portfolio balance goes down then withdrawal rate will go up right

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um so let's imagine something like this i'm going to target 4.7 withdrawals so that million dollar

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account would give us 47 000 a year however if that withdrawal that forty

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seven thousand dollars ever hits six percent right so now my my my

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uh my portfolio balance is down enough that the withdrawal rate is up

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um i will reduce my income right presumably in this case back to 4.7

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however if the withdrawal rate hits four percent so the account balance is up

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uh enough that the 47 000 withdrawal is now four percent of the portfolio instead of 4.7 um i will increase my

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income again probably back to 4.7 now nice things about this it's fairly easy

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to to track right we just need a calculator um so it's easy to calculate

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and there's an intuitive link to risk it's it's clearly um less risky to take

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forty seven thousand dollars from a 1.5 million dollar portfolio than it would be to take it from an 800 000 portfolio

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right i mean that's just entirely obvious right and so the the guard rails and the adjustments um have

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an intuitive link to that risk that we saw earlier which is hey if risk is down a certain amount

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i want to be able to let my clients know and if risk is up i want to be able to let them know and that it's time to make

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a change the problem is this can work this can

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seem to work okay for kind of a simple plan that just has portfolio withdrawals we'll actually see that even in this

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case it actually doesn't doesn't scale across time but if this were the the the kind of plan that we

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were always doing at least at the beginning of the plan we might it might have some legs for for a short amount of time

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um the problem is we want a system that will scale all the way to fully complex

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more realistic income plans um like this one that has a couple of social security

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income flows some portfolio withdrawals it has the retirement smile and you can see the shape of the planned

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portfolio withdrawals is anything but constant and so we're going to see this as a this

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is a big problem for something like withdrawal rate guardrails

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the first problem has to do with how the risk of a particular withdrawal rate changes

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over time so this is actually a problem even for that simple plan

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with with just flat inflation-adjusted portfolio withdrawals

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so what happens as we age as clients age is that the length of a plan

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will go down right even if we keep longevity risk the same so let's think

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of longevity risk as the risk that um you live past your

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plan your planned uh your plan horizon um so if it's a single individual you

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know you could maybe have some um some life expectancy numbers if it's joint it would be you know the chance that at

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least one person lives past um that joint life expectancy um but regardless

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if we keep longevity risk constant then this um kind of darker blue line that

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starts uh up on the left around you know between 30 and 35 so that's the joint life expectancy

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sorry not life expectancy but it's it's it's the plan length if you were planning um

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for i believe i grabbed these numbers as a uh basically a 30 chance that somebody

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lives longer than that right so that's your your longevity risk here is 30 30

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chance somebody somebody goes longer than that but over time if i keep that 30 percent risk the same of course as these as

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these individuals age the the plan length would come down now it's not one

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for one if we live a year we lose slightly less than a year

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in uh life expectancy so we get credit for having survived that year right um

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but as this comes down we have less and less time that we have to fund that means that the withdrawal rates

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that are available at any particular risk level or you know sticking to the success and failure

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paradigm success rate um those are going to go up right again

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this is this is fairly intuitive right and um so we can see if if all risks

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were kept the same longevity risk and you know success and failure estimates

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the withdrawal rates that we can actually afford would be going up over time no matter what risk level we chose

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and so we can see why this would be a problem for withdrawal rate guard rails

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it's great that withdrawal rate guardrails have an intuitive link to risk but the the actual values

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um if we wanted to keep that link to risk would have to change over time right so we can't apply static

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withdrawal rate guard rails in a world where risk um where where the amounts available

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actually are changing even if we kept risk the same all right so that uh kind of dummy uh example i had

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earlier of 4.7 uh is the middle and then four and six are the are the guard rails

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um if we superimpose that on these rising withdrawal rates

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we see that you know let's imagine we started on on the at the green line here right just under five percent well by the time i'm let's

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call it you know 66 67 um

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even if everything had to stay the same sorry if i if i were taking that 47 000

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and now it were a six percent withdrawal that withdrawal rate plan would be asking me

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to take a pay cut when in fact nothing has changed for me risk-wise i

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have exactly the same risk as when i began the plan right and so you know and you could

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even imagine a situation where um this this would be triggering a

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reduction when in fact my risk has gone down right maybe i'm now i'm 68 69 now i actually could have a pay

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raise but it would be asking me for a pay cut right so by ignoring this that the way that risk and withdrawals and

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and um and life expectancy interact as a plan proceeds

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the kind of static withdrawal rate guard rails would really do a disservice to this

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to this client but of course it gets it gets worse um

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so often a plan will have planned changes in spending which would translate into planned changes in

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withdrawal rates um over time so this is you know kind of a familiar picture of

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the of the retirement smile it's uh reflects the idea that people would

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spend more early in their retirement when they're typically younger healthier more active but that on an

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inflation-adjusted basis that spending would come down over time um and then potentially take up at the

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end of the plan and you know this this is can be very

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attractive to people both because it does reflect what is intuitively kind of a normal life cycle

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but also because it provides more income available toward the beginning of the plan when you need it the most so it

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can make you know assets and resources you know go farther for a particular

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client or it could you know bring risk down basically um you'll see here that typically

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15 to 20 percent more income toward the beginning of retirement is available if somebody plans with the

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retirement smile so very attractive however

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we would now be in a position where we can't track withdrawal rates and know

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whether a change in withdrawal rate over time was planned or unplanned and we

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only would want to react to changes that are unplanned changes where things have gone worse than expected or better than

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expected so an example is here if i began withdrawing 174 000 a year at the

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beginning but in about 10 years i'm i'm planning to have 150 000 in today's dollars

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um i i wouldn't know um you know 10 11 years from now

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let's say my balance has gone from 3 million to 3.8 million um would i

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you know given that my rate is now 3.9 percent would i then get a pay raise because it's under

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four or is that just that was the original plan anyway so we shouldn't make an adjustment

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um in order for this to to work um we would need to know

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at every single point in the plan what the guard rails are so in this place case i i plan for higher income because

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the the uh the retirement smile gives me that right so now i have a target of four five

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point seven percent um i'm supposed to increase it at four point three and decrease it at seven so i kind of raised

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all of the guard rails and things a little bit but it's still not clear to me what i should do here right is this a

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time where i should leave everything the same or is it where a place where i should adjust in order to know that we would need

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an incredible incredibly complex set of tables of withdrawal rates

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and of course it gets even worse because um i would need a different set for every possible

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combination of ages and and portfolio balances portfolio allocations and fees

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and longevity goals and plan links and so on um

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but what truly makes it uh unworkable is uh is this pattern that we often see

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with retirees who retire maybe in their late 50s early 60s even mid 60s and are delaying social security

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so in this situation um think of this as like uh

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you know like like a swimming pool with a deep end and a shallow end uh now this one happens to have a drop off right

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well we have to fill in the deep end of the swimming pool with portfolio withdrawals with water right

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but it's going to be shallower once we get into later later in the later in the retirement and so here

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focusing on withdrawal rates uh is again going to be very difficult right at the beginning we're taking 67 000 a year one

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social security kicks in mary's here then we're going to drop our withdrawals to 55 000.

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um john social security starts we're down to 24 000. we have the retirement smile superimposed on top so so much so

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that 24 years from now we're actually planning for 10 500 in withdrawals so um

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this shows how a focus on withdrawal rates although it's really useful for research purposes um

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we really need to step away from it when it comes to realistic client situations in fact it's even

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beyond you know showing how uh withdrawal rate guard rails are unworkable for a situation

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like this um often you know maybe clients have read articles about what a safe withdrawal

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rate is um and so they'll wonder what what the plan's withdrawal rate is you know unfortunately this is exactly

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the kind of situation where we might have to kind of walk them back from that that sort of a focus right

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because maybe if they have a billion dollars let's say it would look like a 6.7 withdrawal

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right here and it is at the beginning um but that's really we don't want clients to fixate on the

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withdrawal rate because it's not representative of the plan's risk overall right it's it's going to be

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we're planning for the sources of income to change over time and so that's it's just that's not a a piece of data

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that's going to be very useful in in this plan

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okay so what's the solution to this um the solution is to

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um base the income adjustment plan on the concept of income risk right so what

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we i said earlier you know some of the some of the really nice things about

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some of the more you know quote unquote traditional approaches to dynamic income planning strange we call them traditional since they've only been

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around for maybe you know 20 years at the most but uh one of the nice things about them is

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they tend to have an intuitive link to risk at least when you're looking at a

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simplified plan one that's only being funded by portfolio withdrawals for example so we don't want to lose that

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that that's the key the key is that we want to react to changes in risk when the risk is

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has gone far enough in one or the other direction that it would be prudent for the client to make an adjustment and

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that it would be worthwhile so what is income risk it's simply the chances that the current

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planned income or spending will not be sustainable without

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adjustment in the future um now probably a lot of you have already

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realized well that's just you know basically probability of failure right but you know derek and i have talked

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elsewhere and many times about how that particular framing is really

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a problem i also talked at the beginning of this webinar about that so um i think

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kind of abstracting from it and saying hey you know how risky is our current kind of income behavior spending behavior that's income risk and it's a

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combination of everything it's a combination of non-portfolio income sources and characteristics things like

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the timing of social security or the you know inflation treatment of a pension it's a combination of things like

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portfolio balance allocation fees spending and legacy goals coming to play here the length of the plan certainly

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comes into play here right um so as an example if if nothing changed and i simply lived 10 years but i was still

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taking the same income from the same portfolio balance risk has gone down right we saw that earlier with with how

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those those withdrawal rate curves go up so that's that's income risk and we want

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to base our our income adjustment plan on that so the structure of a risk-based

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retirement adjustment plan would have kind of a target risk level

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and because this is a dynamic plan one where you'll adjust before you you know

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even get to the cliff's edge let alone run off it typically we'll see people explore plans that do

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have a risk above zero right something greater than uh you know estimated no chance that this

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that you'll have to adjust down um so maybe it's now there are people where that's appropriate right either they're

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particularly risk-averse or they just don't need as much spending so another nice thing about this kind of

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paradigm is there's really no right answer for everyone about what the the right adjustment plan is for them um but

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the example here is let's say you know maybe we target a risk of 20 if that risk ever comes down to zero

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meaning now we're predicting that if you kept doing what you're doing you'll never have to adjust right so you are you have a huge buffer

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in your risk then we'll raise income raise spending um in practice that might be

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um yeah you can you can you know take that vacation you can do that project or it might be you know live a little go out

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to a few more meals um you know buy the nicer wine whatever it is

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and if risk goes up enough then we will cancel tightening the belt so in this

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case let's say that you know risk goes from 20 to 70. right now there's a 70 chance this isn't gonna work out without

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an adjustment still a chance you could make it right but at some point risk will have gone up enough that

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you'll say well uh i'm gonna go ahead and make an adjustment now you know even though it's not a sure

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thing i'll need to i'm gonna make an adjustment now and so that's what that's what this would be and then that change could be

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all sorts of things but clearly you're moving if risk is high you're trying to move your risk lower if risk is low you're moving your risk a little higher

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and then what we want from this is um is a

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possible kind of a a landscape that clients would move through that keeps their income kind of

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in a in a reasonable range for them right so maybe it's a range where

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income never goes below a certain kind of floor

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a level of essential expenses that they have uh have figured out right so we want to always

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we always want to kind of balance the the goals of standard of living and legal and experience goals risk

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tolerance goals um to provide these these income experiences and so you'll see here you know this is uh

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just an example with um i guess six different um possible ways

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that that income could go for a for a dynamic plan you see um you know some stair steps up a few stair

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steps down those are the income adjustments up or down over time

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so one of the things that i said we would want out of a scalable

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you know robust approach to income adjustment planning would be that we could

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communicate it well and it would be understandable to clients so

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the process to to getting there is we would

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estimate risk holistically in this way that i just laid out right put everything about the plan

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all of its special features together and estimate risk um

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we would target an income plan that fits the household's risk preferences so again there might be people who who say

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look i i i never want a call from you that says it's time to to tighten my ballot

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now you can't guarantee them that but you can say well then we'll plan to really minimize that that likelihood

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right or and and by the way what that will mean for them is they'll have to spend less now

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right or it might be someone who says look i'm i'm young i want to live a little i can

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i can absorb a reduction in my spending in the future if i really need to but let's let's go for it um so you want to

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target an income plan that that fits them um and then you want to build contingency plans

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the guard rails that are also comfortable for them so again somebody who's more risk averse might want that

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guard rail that says it's time to adjust down um they might want that guardrail to be pretty far away right and there

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are ways to do that so basically allowing risk to go

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to have a big buffer before risk is high enough that they would have to adjust

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and then we want to monitor this plan regularly and then we

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we would communicate the plan as much as possible in dollar terms so there's all sorts of analytics going on down here

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we're estimating risk or you know there are probabilities and things involved but we want to communicate in a way that

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sets the expectations in an understandable way so for example here we have a 2.2 million dollar portfolio

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um their particular target income level their risk level

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puts them at taking thousand dollars of income per month they're going to pay some

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taxes in that they're going to spend spend money out of that and by the way this income word it's total income right

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it could be a mix of all sorts of things not just portfolio withdrawals right so we don't want to immediately have people

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you know divide um 14 000 by 2.2 million and get their withdrawal rate it's not right there are

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other income sources in here it could be a rental property certainly some social securities and so on

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and then most importantly we want to set expectations about what could make this

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uh this income level change and so here we see the income adjustment

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plan where if the balance goes up by five percent they would be allowed to spend more if it

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went down by 20 percent they would have to tighten their belt and crucially you will see

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these uh these income guard rails change based on the plan for example if

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a plan is heavily funded by social security and where portfolio withdrawals are playing a much smaller role you

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might see a much larger gap toward the uh the income decrease

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right it might be a 30 or 40 decrease needed for an income adjustment down because so security is doing a lot of

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the heavy lifting on the other hand if you have you know much more of your portfolio or your

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retirement income is being funded by portfolio withdrawals you might see those guard rails be a little bit closer

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this is also you know the advisor would have total control over what exactly these guard rails are right so if if

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increasing at a five percent um increase in the portfolio seems a little too close we'll just just move the

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increase uh trigger a little farther away right say hey i get it things would be going in a good direction if this

34:30

happened but we're going to wait a little longer until we take take the increase

34:37

um it's important though not just to set short-term expectations of hey what what

34:43

could cause over the next let's call it a couple of years a change in our income and change in our

34:48

spending but also kind of a longer term view right because obviously a plan could have more than one adjustment over

34:55

time at the very least we would expect to have multiple inflation adjustments over time right but we probably would

35:02

have more than one kind of risk-based adjustment as well so what kind of could the whole income experience look like if

35:09

following um a dynamic plan of this sort of risk-based

35:14

plan and so this is this is another way to to kind of set those expectations

35:19

more long-term expectations for clients so here you know what we do at income lab is

35:25

we simulate uh this plan playing out over the full length of the plan

35:32

taking income adjustments when the plan calls for it right raises when it calls

35:37

for it and pay cuts when it calls for it and then we just say hey overall compared to what we had originally planned you know how often did i get

35:44

more than expected how often did i get less than expected in this case this is a relatively conservative plan so 88 of

35:49

the scenarios with total lifetime income above plan on average 26 more right so you know a

35:57

nice set of uh income increases over time um but clients will often want to focus on

36:03

the downside which is which is fair enough right that's that might be kind of the risk of version coming into play

36:09

and there were scenarios in this case 12 of them then ended up with less than expected overall but on average it was

36:15

only three percent less which you know depending on the plan in the household that that

36:21

may or may not be something that they would notice twelve percent below that probably would be something they would notice but crucially this is a place

36:28

where we can kind of you know paint a picture that shows hey even um you know our estimate of a really bad

36:36

scenario is not total financial ruin right this is something that we you know

36:41

could maybe absorb and if it's not something that a household feels they could absorb and you think you know kind of the very tail end the worst case

36:48

scenario is something that's worth looking at that's a time to go back to the plan and maybe make it a little more conservative

36:54

we don't just want that overall picture though we also want to be able to set expectations of

37:00

kind of what this could feel like in terms of adjustments how often might

37:05

i see an adjustment right so the cadence and how large could these be

37:11

now this is a wide range of simulations so we get some some pretty wild stuff in here but on average

37:16

they're seeing an increase every 1.2 years for this plan right now this includes inflation adjustments right so

37:22

this is really helping clients understand hey how often you know in my annual meeting or

37:30

um you know how often am i getting a phone call saying hey we're we're recommending make

37:35

an adjustment um it also gives us a range you know the the 90th percentile is probably the best

37:41

thing to look at here of okay normally that's between 5 and 10 on the upside between 0 and 8.3 on the

37:47

downside and you'll notice that the downside adjustments are much less common um

37:53

although if if there are downside adjustments you may tend to see a few in a row right maybe it's a 2008 situation

37:59

or something like that okay so let's kind of summarize the the view of

38:06

these total risk guardrails they are actually easy to communicate if we abstract away from the you know the

38:12

hardcore analytics and just focus on dollars and you know a few other um ways to kind of paint the picture set the

38:19

expectations most crucially it handles the complexity of real life of different um

38:25

of different income sources of the fact that we age and our longevity expectations will change

38:32

it it is a way to track all of the the uh interrelated parts of the plan

38:39

it allows us to keep communication at that higher level of abstraction because you know risk is the point of even those

38:46

kind of more traditional approaches to uh to retirement and complaining with adjustments

38:51

and maybe most importantly it actually scales across clients and across time so different types of clients you know

38:57

totally funded by portfolio withdrawals barely funded by portfolio withdrawals with the retirement smile without the

39:03

retirement smile um delaying social security not delaying social security all of that is is is you know

39:10

easily handled in this kind of a paradigm and crucially across time so as

39:15

we kind of live okay first we're taking portfolio withdrawals then social security starts

39:20

that will have caused a change in the risk profile right they've gone from kind of somebody who had fair uh fairly high portfolio withdrawals so

39:27

maybe more sequence of return risk to someone who's now planning for lower portfolio withdrawals lower sequence of return risk so it's scaling across time

39:34

for the same client as well so that's uh that's kind of an overview

39:40

i think uh derek i know you uh you use this with with clients i if you have uh

39:45

any any comments on on how this is played out for you um love to hear

39:51

yeah yeah so for me you know really when you're meeting with that client who's pre pre-retirement or in

39:57

retirement i think there's just there's so much confusion around income and how do you generate it and

40:03

all that and i've actually found it kind of interesting i was thinking as we're going through this today that for a

40:09

number of people i mean uh talking in terms of income just total income this

40:14

is how much you actually get to take home here's the guard rails it's actually so much simpler than

40:20

so much of the stuff that's out there that actually people who some prospects that have come to me and tried to do a

40:25

little bit of their own homework like sometimes i have to even kind of step them back because they're like well you know trying to compute the withdrawal

40:31

rate and things like that from the portfolio but showing them now okay actually show a visualization of here's how your

40:38

portfolio withdrawal rate's going to change if you want to kind of achieve this constant

40:43

level of spending for our retirement and smooth that out so

40:49

at the end of the day i do think it's really powerful way to show that um it

40:55

has been um just you know in some ways so much simpler than everything that everybody's

41:02

trying to do and compared to probability of success and it's just these withdrawal rates when you're not accounting for you know

41:08

what's happening and the rest of the income picture that uh yeah there has been some

41:14

additional and just coaching somebody that it really is as simple as that and that's where i

41:19

like to keep my focus because you know getting lost in the analytics and the weeds of it and it's over the head of

41:26

at least 95 percent of my clients not a very very useful way to spend our time and i'd rather

41:33

just talk about you know here's a good strategy for you look at the long-term metrics is it somebody on that path

41:39

um you know make sure we get the long-term strategy right but then managing the guardrails and now it's

41:45

time for an increase or decrease and keep the conversation that simple

41:55

all right i think we've got a little bit of time for for questions looks like we've got quite a few so not

42:01

quite got quite a few i will uh i'll start walking through them uh first one here is kind of around the asymmetry of

42:09

the guardrails um so uh the user noticed in one of the slides so four point seven percent withdrawal rate six and four

42:15

percent guard rails means the top guard rail is one point three percent higher and the four percent guard rail is 0.7

42:21

percent lower this is a asymmetrical um symmetrical guard mills guard rails

42:27

would mean the same difference for the upper and lower guardrails can you just explain the logic behind kind of setting

42:33

guardrails um yes so i would say and i'm trying to

42:38

find what where my uh where my little example was uh i think it was this one right so

42:46

so um this was really just a just an example that i pulled out of thin air um so so

42:52

it wasn't necessarily something that i would have uh implemented um you know in an actual client

42:59

situation and as we saw you know these withdrawal rate guard rows really are not something that you can apply over time um however

43:06

the the asymmetry is definitely a thing and so we see it here where

43:14

the um income decrease plan is much farther away right it's going to take more of a

43:19

change to have an income decrease than it would um to have an income increase

43:25

and that's simply by design here right so this would have been an advisor who thinks um that that asymmetry is

43:31

reasonable for this client's risk profile i would say that's typical i don't know derek what your thoughts are

43:37

on there it would take like a real you know spock like vulcan you know purely rational uh person to say no i want it i

43:44

want to be right down the middle i want a coin flip on whether i'll be increasing or decreasing um again maybe that person exists that's

43:51

fine no i i do think it's um

43:56

when i'm working with clients the the focus of the clients tend to be much more on the downside in my opinion

44:02

the upside is nice it's great to be able to get get an increase but i even have clients that you know

44:08

have told me they they would take an increase if they if they got to it or maybe they maybe

44:14

things changed down the road but right now they're like a guy would have got i can't imagine living more or spending

44:20

more and i'll leave that to my kids or my family or charitable organizations but um i do think there is

44:27

that asymmetry is normal and again just a note like as justin mentioned you can go in and

44:32

you can adjust that in the settings if you don't like the asymmetry that's there don't think that fits well for the

44:39

client situation yeah we may have a question on this

44:45

obviously you actually just just answered the next question which was can we set the except acceptable risk levels

44:50

in the software yeah so if you know typically like the workflow

44:56

would be you know we define everything about the client including the risk tolerance longevity risk and income risk

45:03

tolerance and we get this kind of first first cut right and we say okay are

45:08

those is that where we want the guard rails i mean both in terms of well is maybe

45:14

you know 20 that's that's a little too close so i want to adjust the risk to to give them a little

45:20

more buffer or maybe five percent is too close so you say look we're not going to take a a pay raise you know next week

45:26

when we have uh by the way actually income lab runs these monthly so so you do need it's a it's a monthly cadence so it's not like

45:32

we're checking every second to see if you're up five percent um but you might push that guard rail out

45:38

um and and in practice what really happens when you hit these guard rails is it's a it's a time when you know a

45:45

conversation is going to be worthwhile right because sometimes even on the downside you might say well rather than

45:51

taking a pay cut we're going to take that million dollar legacy goal and drop it to 100 000 or something right i mean

45:56

there are other levers someone could pull in that situation

46:02

awesome and then put note on that too if somebody would want to get really precise it's in the advanced settings

46:08

that they would go into to adjust the the guardrails right just blank that's right yeah in the income

46:13

settings there's a place where you can say customize income settings and then you know go go wild

46:21

and then uh next question here is how does the software incorporate social security cola increases

46:28

yeah so um for one thing we didn't talk about in the webinar but you can you can set a plan

46:35

to be monitored um by the software so we call that implementing a plan and that means once a month we're we're

46:42

re-running the plan and checking whether any guardrails have been hit whether any um you know uh

46:48

inflation adjustments are necessary and so on all of that is you know an advisor can set the thresholds

46:54

for those right we're not going to make 0.1 inflation adjustments um and so in

47:00

january um we will adjust the social security flows in the plan by the

47:06

um by the that year's social security cola i think that's actually set to be

47:11

announced in october i've seen some fairly eye-popping numbers uh for this year we'll see what what actually

47:18

happens but it'll it'll kind of do that automatically um to to make sure that we're keeping it on

47:23

track um yeah and then that next question here is uh can you speak a bit about how the

47:29

investment location affects the guard rails for example does having twenty percent of their assets in an annuity

47:35

versus a hundred percent in an ra affect the results

47:40

yeah um so the interaction of taxes and guard rails

47:47

is um is kind of interesting uh in in a way uh

47:53

like the guardrails don't care to some extent whether let's say you

47:59

have a you know 60 40 portfolio in an ira or in a in a in a taxable account because the the

48:07

the sequence of return risk would be very similar i understand that there might be some kind of ongoing passive taxes in the taxable

48:14

account um so the gross amount that you're withdrawing for your from your portfolio is the same what really would

48:19

matter there is the net spendable amount right and so there is this you know

48:25

retirement income planning is is kind of incredibly complex there is this really unfortunate place where really

48:32

the risk of your withdrawals depends on your gross withdrawals

48:37

whereas the experience of your withdrawals depends on your net of tax withdrawals right so

48:43

it's kind of a place where things don't match up exactly right and this is a place where people will tend to do a

48:48

little bit of um you know a b testing on different approaches to um

48:54

distribution strategies for example whether you're taking from you know taxable accounts first text deferred accounts first

48:59

and so on to kind of zero in on a plan that works from a net perspective as well but yeah the

49:05

the risk tends to be focused on gross gross withdrawals um

49:11

there is a setting in the software where you can say well hey i want to define my gross my net withdrawals you tell me the

49:17

gross withdrawals tell me the um the risk profile of that and and so that's if

49:23

you're really focused on net withdrawals that's that's the way to do it once you've figured out okay

49:29

it looks like they can afford roughly you know ten thousand dollars a month um maybe solve for that income and and the

49:36

software will gross up for for taxes awesome and then uh next question here

49:42

is what if a client would rather adjust or increase their portfolio risk than reduce their income how can you adjust

49:48

that so that there's only enough additional exposure to keep income at equilibrium

49:54

yeah that's another these guard rails hitting a guardrail is really a time to have a conversation

50:00

right so if it's on the upside um someone might you know like derek said they would say well look i i don't know

50:05

what i would do i mean maybe they can't find a one-off expense right but it's not that they're going to raise their their total

50:11

standard of living forever so now um maybe that's an opportunity to say hey i know you were you know

50:17

uncomfortable originally with this level of stock exposure actually you could afford a little less stock exposure

50:23

right so you can make an adjustment there or vice versa right if if if you think it's prudent to to increase stock

50:29

exposure at some point for example so my example earlier was changing the legacy goals um

50:35

you might change some some spending goal right maybe there's a particular spending

50:40

goal that you had like you know funding a grandkids education or something like that where where that could be changed

50:46

as well so there are a lot of levers in a plan that can be that can be used

50:53

to to adjust risk the plan itself would be calling for changes in spending changes in income as the lever to keep

50:59

risk on track but um in practice people are going to pull other levers as well

51:05

and i think this uh question is kind of a follow-up thing to that point justin it says that if a very risk-averse client couldn't

51:11

handle the worst case downward adjustment what is the best way to look at modeling modifying the plan in a live

51:18

meeting so i think it's back to kind of those levers you mentioned yeah i think you

51:23

know you'll need your your bag of tricks on what kinds of things you you believe are are good to use for for those kinds

51:29

of clients um you know there is you can even right there just move the

51:35

income setting slider just move it to the more conservative side to get a quick hey let's instantly make

51:41

a more conservative plan that'll reduce income reduce guardrails and so on um so i think if i were doing in front of a

51:48

client that's probably the place i would go um there are you know depending on your your approach

51:54

there are ways to kind of put floors on on income and so on um but that's that's probably if i were

52:00

live with a client that's what i would do yeah just to add to that

52:05

live with the client that's the most useful thing but then also to note that you can go

52:10

into the um when you're looking at the long-term income experience and you can see

52:16

okay we move this over you're going to see the short-term guardrails but i also i would also hop over to the

52:22

the long-term impact to see if this now fits better for what somebody could tolerate

52:30

and then uh this next one's interesting it's uh how easily can an advisor track whether or not the client is following

52:35

the guardrails advice um

52:41

so the way that income lab tracks guardrails uh is people have asked us before hey do you do you track spending

52:48

kind of in like a mint.com sort of way um and we don't um

52:54

you know i that that would be a really cool feature but um what we'll see is you know if you spent

52:59

less than your plan your portfolios will be higher than expected if you spent more than your

53:05

plan your portfolios would be lower than expected and that's really all that matters to this so

53:12

for example um during the pandemic probably a lot of people you know canceled vacations they went out less

53:17

they you know so they just spent less and so you know a lot of people would have seen kind of risk going down so

53:24

their kind of situation getting more and more positive through that period um

53:29

at least from a financial standpoint um and and and that would naturally been captured if you were monitoring the

53:36

the plan um but you know yeah we're not um you know kind of tracking credit card

53:42

spending and things like that um and the next question here is more

53:48

around um kind of the taxes of the software is um does the tax bracket management try to use all of the tax

53:55

bracket i.e 20 each year or does it try to average them as close to the 22

54:00

overtime no it's um so bracket management is just

54:05

trying if there's space within the targeted bracket which is the federal one of the federal ordinary brackets

54:12

if there's any space left once you've already had all of your uh you know income from pensions and

54:18

social security and everything else and then taking the withdrawals that you need

54:24

to to meet the plan if there's still space within that federal ordinary bracket it will figure

54:30

out how much of a roth conversion you could do and still be inside of that bracket

54:36

so so that's that's the way it works it's not trying to give you an average of that level um

54:43

and really it's not even saying you know if there is no space in there how could i have you know gotten down to that

54:50

level right it's only if there's if there's you know a kind of a space left in the bucket

54:59

awesome uh this another interesting question but more um again back to taxes is uh this advisor's

55:05

notice you know there's clearly some difference between income lab and income solver is there anything income solver

55:11

does that you don't for example would you say your roth conversion planning is as robust

55:18

um i'm not um you know intimately familiar with income solver i would say if you're seeing

55:25

differences between um income lab and any other you know planning related platform could be a

55:31

generalized platform or anything often those differences are related to you know capital market assumptions

55:36

growth assumptions inflation assumptions all sorts of things that you know are important very important but are kind of

55:42

you know superficial compared to the um the the analytics themselves um

55:48

so i don't know if any anybody has other you know if you have more more experience with income solar i know that

55:54

they focus very i mean the point is uh is to do tax planning um

56:00

so i guess probably one of the biggest differences is that you know income lab is focused on uh dynamic

56:06

uh adjustment based planning as well yeah if you have any users who have experience or direct if you have

56:11

experience please share if we have any users who do have experience of both please share that in the chat as well um for those people

56:18

attending i was just going to quickly say i don't have experience specifically with income

56:23

solver but in general there are times when i'll i'm using multiple software programs and

56:29

i might compare the you know the roth recommendations between two and i might say

56:34

so much to me rock conversion planning is as much art as it is science and would the client even

56:40

be willing to do the whatever the software is recommending sometimes it's more aggressive so i i

56:45

kind of like to sometimes you can look at those different results if they're different try and figure out is it the capital

56:50

market assumptions what's what's driving that but oftentimes that's just instead that's it but it is um

56:57

sometimes helpful to kind of see it from multiple perspectives and make sure that it's aligning or things aren't just

57:02

totally out there and then investigate further see what might be driving that

57:08

yeah and typically you know like if you're using so income labs tax center is really

57:14

the the goal is to help you build a a long-term income plan and hey you know is this a better way to do taxes or not

57:22

we do have

57:29

derek i think i lost justin or is it internet on my side i think i lost justin

57:35

we may have lost we'll see if he comes back oh justin are you back

57:42

i never left i don't know we did we didn't lose you on our side

57:47

for about 10 seconds or so i was just saying you there are some

57:52

areas to find actual estimates of like the amounts you would convert for roths

57:58

clearly you're going to want to to double check those right because it those are based on you know estimates of how much you would have in dividends or

58:06

how much you know all sorts of other things would have happened that year especially these days when re um

58:12

so what's it called re-characterizations aren't um available you'd want to be pretty sure

58:18

before you do good uh you know large size roth conversions yeah and just from a practical

58:24

perspective how i i'll use like income lab for that long-term strategy to dial that in but then i personally use

58:30

holistic plan i like to jump into that software and like really fine tune based on the client's return and income that

58:35

we know for the year to take that shorter term view is how i approach that awesome and i

58:41

know we're up on our last minute so one last question this one was uh received another vote so i'll throw it out there

58:47

um this uh user said that real life has left being lumpy spending house remodel

58:53

trip to europe new car how does income lab take this lumpy spending into account

58:59

yeah we call that other or variable expenses and it's it's super important so you put that into the plan

59:06

as hey this is one of our spending goals one of our lifestyle goals right and then the plan will adjust for that

59:13

which i think is is a real power of the total risk guard rails compared to something like the

59:20

um withdrawal rate driven guardrails where it's assumed to be constant because that just doesn't match reality right good

59:26

point all right guys well hey we are up on our time thanks so much again for a great

59:32

presentation and for a great q a for all of our users thank you again for attending and for your great questions

59:39

today um just a reminder that at the end of the webinar you will immediately get the survey to put in your cfp id um your

59:46

information so that way we can make sure you do get your cfp credit uh ce credit for attending this webinar otherwise

59:53

please be on the lookout for our follow-up email with the recording um email uh sorry with the recording link

59:59

justin i know people ask for the slides as well um you and i talk and we can probably add those slides on to that follow-up email as well and then for our

1:00:06

invitations to our webinars coming up next month all right derek justin thanks guys hope

1:00:12

you all have a wonderful day