Thinking and Talking About Retirement Risk with Clients Webinar - January 2022

all right good morning everyone uh welcome to our webinar this morning uh we have some

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folks joining so we will give it a few minutes to let everyone get in here and then we'll kick it off

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coming in

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looks like we still have a few more folks coming in so i'll give it another 30 seconds

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perfect well hello everyone and welcome to our income lab webinar this morning

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uh we have our panelist justin fitzpatrick and derek tharp here

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to lead uh this discussion on thinking and talking about uh retirement risk with clients this is a topic that many

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of you have requested so we're super excited to put this on for you all um

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and just some housekeeping items before i turn it over to our panelist we will have a q a session at the end of

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the webinar and so you'll see in our zoom uh space here uh you'll see a q a

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um button on your toolbar uh feel free to put your questions in there um you

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can also view other folks questions um and like so to move the questions up in the queue and then after that we'll just

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work through um the questions for our panelists and uh you know after the webinar we will send the recording link

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out as well so um if you do want to go back and review uh we'll get that sent out tomorrow and um you know for some of

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our folks here who are new to income lab if you'd love to set up a demo or meeting with our team after as well you

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can reach out to us through our website or to info income laboratory.com and we're more than happy to set up a zoom

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to show you the software and get you in there as well perfect well all right guys that's my feel i will turn it over

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to justin and derek can you guys hear us okay sounds good

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thanks for joining everybody happy january um we're having a snowstorm here in uh in golden colorado so i don't know

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what it's like where you are but um yeah this is a topic i'm really passionate about um and kind of like our last user

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webinar there'll be some things here that are a little more for you know advisors thinking about risk and

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retirement but we really want to focus on also ideas and concepts that you can use

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in talking with clients about retirement risk and rolling those concepts into

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your planning process and your your monitoring and management process uh in that relationship with the clients

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um let me make sure this is yep okay okay so a quick outline for the webinar

Webinar Outline

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today um we're gonna spend a fair amount of time on um kind of what in retirement income and

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retirement income risk is really like um so we'll talk about metaphors we'll talk about um just some of these these uh

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you know continuums of risk uh then we'll dive into what sorts of things

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actually lead to retirement income risk and what don't so look at a bunch of data there and then we'll wrap up

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talking about client communication and kind of ways to keep things at the right level

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okay so first first to kind of what retirement risk is like i want to start by talking about

Metaphors

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metaphors because um you know it's really common for us to to speak in metaphors i mean really in all parts of

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our life but when talking about retirement risk we'll we'll see this a

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fair amount and i guess what i want to do is encourage everyone to take metaphors seriously

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because they they convey a lot of information and they can actually convey

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the wrong information if we're not careful so the metaphor of a plane crash is

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actually pretty common um to see in in discussions of retirement

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and retirement planning so you might see something like hey you know why should i be okay with a

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90 chance of success you know would you get on a plane that has a 10 chance of

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crashing right that you know just that first blush sounds

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fine right okay it's 90 10 so just pick something and and look at the failure of

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that thing but the failure involved in a plane crash is very different than you know other kinds of failures things like

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you know running into a traffic jam a detour a fender bender and so on it actually contains a lot of information

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so if we use that sort of metaphor with clients they're going to take a lot of information about um what

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what you're saying retirement is like from that and you know probably not going to be a surprise that

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i'm going to argue that is not a good metaphor for retirement and retirement risk

Statistics and Views

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however even if you're not using that kind of metaphor there's messaging

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everywhere if we're not careful and in particular common statistics and views um that you

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may see you know in the media or in um in research um

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in software programs um can communicate more than we'd hope so for

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example you know sort of the grand champion of retirement income statistics is probability of success or

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it's inverse probability of failure so you might see something like the the chart on the left you know

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we're estimating you have a 90 chance of success 10 chance of failure or you might see

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um you know a spaghetti chart like on the right um that's saying hey these are possible

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routes that your retirement portfolio could take over time you know notice some of them go to zero

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well whether we like it or not this actually communicates a lot of things like retirees either succeed or fail

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right that's what the the the graph on the left encourages clients to think right okay

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there's going to be two possible outcomes success or failure this also

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implies that retirement risk is catastrophic because we're using this term failure or even the chart on the on

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the right those lines going to zero that that sure seems catastrophic um or that the magnitude is very high right if risk

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materializes we're looking at total loss total financial ruin and the chart on the the right in

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particular but but both in a way also imply that retirement is static that you've got to make the perfect decision

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now um or else things could go terribly wrong and i'll be arguing against all of

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these as um as actual characteristics of retirement

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um but before getting to that i i want to return to something i've talked about before which is um

Risk Perception

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the way that we perceive risk as human beings so this is you know advisors clients everyone

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is not just as kind of dispassionate statisticians

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so peter sandman who's a an expert in in risk communication

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particularly in the industrial world but i think it applies very well to financial planning as well talks about

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risk and full you know risk perception being a combination of what he calls hazard which you could think of as the

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objective you know that dispassionate statistical thing and what he calls outrage which is

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a little bit more of an emotional reaction that doesn't mean it's not real though this is not something that we can we can get away from

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and he sets up all these oppositions between more outrageous and less outrageous things things that are perceived as

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riskier or less risky and you'll notice all the characteristics i just argued

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are communicated with kind of standard status quo language or statistics are on

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the more outrageous side so catastrophic you know unresponsive or static you know dreaded uh so that would be you

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know high high uh magnitude of failure you know total financial ruin those are all on the

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outrageous side here so so um we could be heightening client perception of risk

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in using that kind of terminology and that kind of framing

Retirement Income

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instead retirement is is actually there's a lot of characteristics of

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retirement income you know how it works that really give advisors and clients a huge

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advantage um over these more dire sorts of ways of of painting things so

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retirees don't either succeed or fail in fact the experiences they will have

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will be somewhere on a spectrum of possibilities some might be a little bit better some might be a little bit worse

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if managed well at least historically we know that that does not include financial ruin

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it because really risk and retirement unfolds slowly

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retirement is a long-term thing we'll dive into that a little bit soon but because of that we we have the

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opportunity to adjust rather than have this sort of static wiley coyote run off a cliff sort of behavior that's implied

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by you know those spaghetti graphs um and in practice um

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at least in studies magnitude of adjustment is often low for for reasonable plans so a way to kind of understand

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how retirement risk really works might be to compare it to a highly leveraged hedge fund because

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those metaphors of things like a plane crash um it really feels like that's

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that's more like a highly leveraged hedge fund people are thinking of examples um right whether it's long-term

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capital management or you know pick your pick your example of a hedge fund that um that goes down in flames maybe it was

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doing fine but because liabilities there can be concentrated in time so maybe you

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know there's a a a derivative position um and it's mark to market suddenly there's

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basically a margin call hedge fund can't afford it and it has to close right so it's sudden

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huge liabilities um that can't be undone once the risk has arisen right so we

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have the derivative position you know i can't go back in time and undo that before the risk actually materializes and so we do see you know

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hedge funds go out of business in comparison retirement income is completely different

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so liabilities here are spread out over time so think about you know your monthly utility bill um

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you know insurance bills going to the grocery store even larger items are spread out over time maybe you're doing

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you know some more expensive vacations or a home renovation but those are often in the future or over time

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um because of that because it's this series of small liabilities that that lay

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themselves out through time and often over many decades risk also develops over time

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and maybe most importantly those liabilities are flexible so unlike

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the case of a derivative position mark to market margin call type situation

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you can change your plan for liabilities so you can you know the example i often

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use is you can go out for burgers instead of steaks you know you can buy a cheaper bottle of wine you can um

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you know shop at safeway instead of whole foods and

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that flexibility gives retirees an incredible amount of power of course

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people would prefer to you know meet all their their dreams uh in in in terms of

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spending but failure to hit every single one of them is is not best compared to a plane crash

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it's not a life or death death situation and again for reasonable plans for

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people who have reasonable range of behavior financial ruin is not a part of

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doesn't have to be a part of this picture so what sorts of things can lead to

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retirement risk and what can't well again focusing on the catastrophic um

What Causes Retirement Risk

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you know when people think about risk they often think about catastrophic things right they're the easiest ones to to bring to mind um in fact that's on

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sandvin's list so things that are kind of you know more easily visualizable are

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are the risks that we think of but it turns out for retirement

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you know the most spectacular historical market crashes um didn't have what it took to to be

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retirement killers so here we have five of the steepest quickest

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market crashes in history and what would have happened to a retirement

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portfolio if someone were taking 50 000 a year out of a million dollar 60 40 portfolio adjusting that for inflation

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over time um this is obviously a very simplistic uh example most people would have social

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security and lots of other lots of other things but uh serving as a as as an example you'll see

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that in in no case did people you know run out of money because of this and we're taking you know five percent here

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right this isn't the four percent rule um in in every case they would have ended up with clo this is inflation-adjusted

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dollars with close to what they began with or more by the end of retirement or for those situations like

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um the recent coveted crash a couple years ago almost exactly two years ago now

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or the financial crisis um so far uh things have have not um

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have they haven't been retirement killers now in particular for the covet crash that is very much a work in

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progress but you'll see these folks are almost up at 1.2 million dollars for the financial crisis it took quite a bit

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longer but they are now about in the same position

The Great Depression

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um just dipping into client communication quickly we often hear that clients are

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asking about kind of the more memorable um or maybe in this case not memory but um

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visualizable things in history like the great depression and it turns out if someone's asking

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well you know what if we go through the great depression we can actually answer that question we can we can illustrate

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what it would have been like um to live through great depression type um

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experiences of course you know today's world's very different from the great depression we have social security we

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have um you know just a lot of different things going on but if if they were to experience the

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same sorts of sequence of returns we can actually illustrate for them what that would be like and so you'll see

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here um this is a graph um from our software but um for these folks um their proposed income

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is let's call it sixteen thousand you can see for most of the great depression people actually could have afforded

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quite a bit more than that doesn't mean the future will be exactly the same as the great depression but um

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instead of allowing clients to kind of let their imaginations run wild about how horrible it might have been

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you know we actually we have data about how things behaved in the great depression

Historical inflation spikes

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what about inflation this is a particular you know headline type thing right now

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again actually historical short inflation spikes so we're talking four or fewer years

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are not retirement killers and in fact the correlation between short-term inflation rates so just year-over-year

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inflation right cpi today versus a year ago and what you can do with your

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portfolio withdrawals is basically zero so there's just no predictive power here

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and in fact it's easy to find examples historically of inflation spikes where

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the portfolio withdrawal is that we know someone could have afforded now with hindsight

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were actually quite high um compared to history um so the last time we we saw such an inflation spike was was in the

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in 1990 and that was among the highest uh the the best periods to retire in a sense

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in history so you see some other examples here from the 50s and 40s that doesn't mean that there's no such

What is retirement risk

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thing as risk so but what we tend to need going back to

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what is retirement risk like what we tend to need is long-term

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low real returns so any way that you can you know that you can produce that situation

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will result in lower retirement income in comparison to

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other historical periods so um here i have uh the growth of a dollar invested in in

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the dow in blue using the right axis you can see that so

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it's a log scale and then in the red and green you have inflation and deflation

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and there really been two periods in the last 150 years that were worst for portfolio

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withdrawals one was leading up to the 19 teens i'll pretty much ignore that today

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it's just people don't have including myself don't have as much kind of mastery of what was going on in those

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periods but let's call it leading up to and including world war one um but maybe more

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um you know closer in time certainly is the the 60s and 70s so the kind of stagflation period and you can see here

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um that the blue line is kind of going sideways going up and down a little bit but bouncing between

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values and the red line was entering a period of higher inflation and this combination

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is what gave us the period that you know bill bengan pointed out as

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having a four percent withdrawal rate in in his study um what's interesting here though is um

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what really matters is i know this sounds obvious but what matters is what's going to come in the

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future not what we're experiencing today or what we have experienced in the past so actually um you know the periods from

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the early and mid 60s which in retrospect had low withdrawal rates

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also had low inflation it was that it inflation was going to be high and high for longer

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periods um the other interesting thing is toward the end of or really even in

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the middle of this high inflation period we know in retrospect that uh portfolio withdrawals could have been quite high

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it wouldn't have felt like that at the time but because we were going to go into the 1980s with

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inflation going down and really amazing stock returns for for quite a long period of time again it wouldn't have

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mattered what you had just experienced in a sense or what you're experiencing at that

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point what matters was what was going to come a really important thing for planning though here is

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you you wouldn't have felt good recommending high um

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portfolio withdrawals at this point and that's okay because we can't know what's going to come in

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the future the solution to that is not to you know make guesses set those in stone

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and just hope you're right the solution is to have a plan to adjust over time so maybe in 1982 which we know

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in retrospect was a time that would have supported incredibly high withdrawals you wouldn't necessarily have counseled

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high withdrawals but by keeping track of the plan the world would have been telling you

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really year over year maybe even month over month at times hey you can take more you can spend more you can you can

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increase your standard of living um if you want to so again there's a lot of power in this

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adjustability i was just talking earlier about how you can reduce liabilities you can also loosen the belt right maybe

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you've been being frugal you've been you know kind of keeping things in check because you're trying to manage risk

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well again there can be signals that risk is coming off as well

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so that gets us to client communication um and i want to just spend a little

Risk in financial planning

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time in wrapping up here before questions and derek's comments on

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kind of uh two ways that we talk about risk in financial planning um

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one is what you know i was talking about the metaphor of of plane crashes and that sort of catastrophic framing and

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how that's not really accurate when compared to retirement income but actually we when

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talking with clients about asset allocation and investing already have a lot of tools

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for working in reasonable ways with uncertainty for working in reasonable ways with with risk um so when talking

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about asset allocation um i'm not sure i've ever heard a financial advisor focus only on the kind

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of the left tail outcomes what are the worst possible things that could happen here instead there's often a focus on

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averages and variances right acknowledging that things could could be a little better or worse or maybe even a

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lot better or worse than than the averages and focusing more on risk management than total risk avoidance

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um often that's because the alternative is not better right so putting money in the mattress um actually your long-term

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returns in inflation-adjusted terms are could be quite bad um and so um in in

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some sense it's instead of seeking perfection which can't can't be found um

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we we just manage risk um and there's also good usually good discussion of the upside right why are we doing this what

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what's the potential um upside of investing for those where it's appropriate

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what i'm talking about here is really applying those sorts of concepts to retirement income it actually turns out

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historically you know a 60 40 portfolio in terms in inflation-adjusted terms

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there's a reasonably high chance of negative real returns over a 10-year period uh in in just a balanced

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portfolio again inflation-adjusted returns famously there aren't that many uh where you have negative um

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nominal returns um so but we don't go to clients and say well i think you know

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there's a there's a 10 chance we'll have um no returns over the next 10 years so that's what we should expect right

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that's not kind of the the common way that we communicate with clients and i think rightly so

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so um how can we do this um it's

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avoiding things like metaphors that that are not accurate

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reflections of how retirement works right so talking about adjustments and

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laying out those expectations as much as possible early on this is you know this

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is how risk unfolds in retirement and really bringing the blood pressure down

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um often by showing something like this where we've actually quantified kind of an

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adjustment plan in dollar terms that helps bring the blood pressure down

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right so we're not allowing uh clients to just kind of imagine risk you know

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where our imaginations can go wild but we're saying and this is just an example let's say someone had a plan where it

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was going to take a 20 loss in their portfolio for them to to adjust downward and if they adjust it downward it

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wouldn't be a huge adjustment that goes a long way to to really specifying to filling in the picture of

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risk for the client so that they can have a better understanding of the geography that they're really traveling through

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right so you're mapping mapping this out for them um in a way that they can they can understand how to

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follow the map also painting a big net that was more of a short-term picture painting a broader

Painting a broader picture

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picture of that geography right so here's the whole map you know this is kind of our a planned route but

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if we encounter obstacles on the way we will adjust right we just saw part of that adjustment plan well

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what's the range of you know paths that we might take through this landscape

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we can actually paint paint that for them and again hopefully bring the blood pressure down you know

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by showing hey even if things you know we talked about that continuum of possible experiences even if things are

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on the lower end of that continuum we're not talking about you know total financial ruin

Research

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um derek has talked about this before and i think um you know his his research with

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with michael kisses on this is really illuminating um because you know don't just take my word

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for it um research survey research um with clients

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uh has shown that this kind of framing so getting away from the catastrophic

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framing um is associated with greater positive emotion optimism preparedness

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confidence and a downturn which is which is huge and less negative emotion less stress um

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greater understanding of the plan i think is is is a big one right if we're using kind of overly complex statistics

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um not everyone necessarily would take the things we want to from those and greater advisor trust

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which what we found is retirement planning is really about being on a journey with with the client

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right it's not something that we're just going to set them off in a rocket ship and gee i

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hope they land in the right place right we're with them along the way and so that advisor trust um

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is is really important um so with that i think we can

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um open things up the questions and actually i if you want to go back one slide for a

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second i can touch on this a little bit um further as well and um with this study what we were doing

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was we were experimentally actually showing people different plan results so

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one set of participants were receiving basically monte carlo type plan results

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to try and make this you know is least there is most kind of realistic we did

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tell people to assume they were reviewing a plan um for a neighbor right so they were kind of the neighbor needed

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help they were trying to help them go through what had been provided by their financial advisor make an assessment and try and understand

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what was going on and um we showed them at different points in

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time and then asked them things like you know how how optimistic do you think this person should feel about their retirement how prepared do they seem to

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be should um you know how how well would they weather a downturn you know in the market those those types

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of questions um and then one of the things we did was we took them through one time period um and

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i think one thing that's really not appreciated about monte carlo is how fast those numbers can change

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and so we gave one set of clients was looking at my current result one was looking at a guard rails result now the guardrails

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participants were much more aware that adjustment could be possible that it would need to happen

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um but what happened when we simulated basically a market downturn kind of a standard type of downturn and ran actual

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numbers so what would happen to the probability of success if you're running a monte carlo plan what would happen um

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in terms of adjustments if you're using a guardrails plan uh and then the client saw or the you

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know the participant reviewing the neighbors results saw those updated plans and a lot of people were you know i mean we

28:55

didn't necessarily measure it this way but i think they were really kind of shocked right by the the difference with

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the monte carlo plan the plan looked there was no indication a downward adjustment was even something to think about um you know that it

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started out with a high probability of success i actually ran multiple scenarios but um one of the scenarios did start out with

29:14

a high probability of success fell to kind of a 50 probability of success um and that actually deteriorated kind of

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the advisor trust right people reported seeing the professionals

29:26

less competent um less trustworthy uh because of that change and i think you

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know getting back to not only communicating all this because it's the right thing to do for clients and helping them and just

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helping them understand but realize that there's also our own reputation kind of on the line in terms of uh when

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we're giving that advice to a client and if they don't understand it and then reality turns out differently

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um you know that could shake you know their their confidence and their trust in us as an advisor and i think that is

29:58

uh kind of an important uh insight from this research and um we can hop into the

30:04

the the questions but one other general note that i think um you know when i when i first started working with income

30:11

lab um and justin and johnny reached out to me i was really blown away and impressed by the technical kind of side of

30:18

income lab and what it can do um modeling all sorts of different types of things and just the power behind it

30:25

um so that's kind of what really drew me in where i think i've been surprised in how my own thinking and my own work with

30:31

clients has changed so much since getting started is really on the communication side um that wasn't

30:37

necessarily something that i anticipated but you know having these conversations thinking about how things

30:44

are presented to clients and then just having the actual ability to communicate about these long-term

30:51

income experience that's something that um when i'm using standard monte carlo tool right i can't talk about what those

30:58

outcomes would actually be now i can actually guide my clients through a conversation about you know are these

31:04

the right guardrails and um you know i still i still am doing my plan presentations

31:11

to clients where i kind of show results both ways particularly for clients that maybe i originally did a monte carlo plan and

31:17

now i'm trying to shift them over to a guardrails kind of mindset and the result has always been okay we like

31:24

the guardrails way much more that's always been the feedback i get from my clients and um i do think it's for the reasons

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justin touched on um and particularly just that peace of mind of knowing how

31:37

far does the market need to fall right before somebody needs to make an adjustment and then what would that adjustment be

31:42

right i mean when you're running a monte carlo type plan that's just all unknown it's not stated anywhere

31:49

it's not something that's brought forward with guardrails people get peace of mind and a lot of times it's all okay

31:55

my you know particularly if it's somebody's well prepared for retirement uh it might be their portfolio needs to

32:00

fall 30 or 40 before they would need to make an adjustment and then even then the adjustment is so tiny um and a lot of

32:07

times what i'm finding is that people could actually take more spending than they even want to or are taking

32:14

and so you know if i'm saying okay it says you can spend 6 500 a month

32:19

you're only spending 4 000 a month um you know we can bump that up but even under this bad case scenario where the

32:25

market falls you might be calling to cut your spending down to say six thousand a

32:30

month or 5 500 a month which is still higher than you're actually spending right now so just having that conversation i've i've

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had it's been a really big shift in how i'm communicating with clients i'd say the

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response has been very positive

32:50

you're saying that derek um perfect so we have a few questions but

32:55

uh anyone on the webinar this is the time to start putting your questions in the q a section and we'll start uh

33:02

getting some answers out um so justin derek first one here is based on a

33:07

client's planning data is there a way to start a client at the higher income level of the guard rails so for example

33:14

we would recommend you know x monthly income but the client wants to know you know what's the most they could take

33:20

without breaking the plan immediately

33:25

yeah there is um and it sounds like the the person asking the question would know that would make

33:31

a downward adjustment pretty likely if you're very if you're starting income very close to uh to what the guard rail

33:36

um is so um you can go to the advanced settings for a plan and in the income uh

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in fact i think i have a plan open here let me see if i can get an example for you but you can you

Income Target

33:50

can set the income target to be very high um so you know derek was talking

33:56

about guard rails and and total risk guardrails so take everything into account for

34:01

um for this household you know their social security timing their investments just everything um

34:08

and the guard rails are based on holistic risk right so what's the what's

34:13

the chance that um that this uh that this plan will need to be adjusted downward in the future and

34:21

typically we don't wait until that chance is a hundred percent right um we would wait until the estimated risk is

34:27

um you know maybe it's 60 or 70 or 80. but okay well it's enough now that i

34:32

have high confidence that an adjustment is worthwhile so um you can go and set

34:38

the adjustment or set the target to be very high the outcome of that plan will

34:44

definitely be uh you know where there are many more downward adjustments than you had then you then a lot of people would want

34:51

but you go into the advanced settings income settings

34:58

and um you know right here so my income decrease is at 75

35:05

you know i could zoom is making my computer very slow

35:10

right now but i could you know put this target up at 60 or 70 or something and

35:17

and that would work and um next question is what's the best way to

35:23

convey the income adjustment plan section to a client

35:36

um i'm typically having this conversation and it can depend whether i'm working with somebody in

35:41

retirement who's already basically working on the guardrail strategy or if i'm working or if i'm running for someone to use pre-retirement um then i

35:48

might be framing are we talking about what they're spending on retirement versus now um but i i like to keep it pretty simple

35:55

and just talk through basically what you see here so i you know talk about somebody you know we're setting

36:01

some cargrills based on their current portfolio balance of 2.2 million in this example

36:06

uh that would indicate they could spend about 13 700 after taxes personally for me that's that's the

36:12

number i tend to key in on is the after tax number and communicate that um and then communicate you know the

36:19

portfolio what the results are showing here is if the portfolio goes up to 2.3 million

36:25

uh they could take about another 700 in income and if it fell to 1.75 million uh then

36:32

they would need to cut back about 700 and one thing i do also like to usually

36:38

point out is the kind of asymmetry here a lot of times that adjustment is coming here only another

36:44

100 000 of growth get that full 700 increase versus more sizable decline

36:51

to get the 700 decrease but that's kind of how i'm communicating and often i am kind of

36:58

rounding some of these numbers just giving them um nice and clean kind of guardrails to be shooting

37:05

for but that's that's how i'm talk walking somebody through this thanks here

37:11

um did you have anything to add to that at all well i was just going to say that asymmetry is really important um and

37:16

that's by design so this plan was just built to have that asymmetry to try to match

37:22

a typical household's risk aversion um if you had someone who really wanted to

37:28

be more 50 50 chance that you know kind of shoot shoot in between the uprights then you could

37:33

build a plane like that next question is you know this approach

37:39

is clearly easier to get clients to understand you spend dollars and not percents um that being said how can we

37:46

use this to show the impact of changing their savings rate um seems like this is where clients

37:52

need a nudge that pretty clearly comes out when you

Income Adjustment Plan Nudge

37:59

run different scenarios with different savings rate assumptions there that's something i

38:04

i am using um you know even with pre-retirees i actually i like guardrails for even for

38:12

pre-retirees um and more than i think probability of success i'm talking like accumulators

38:17

younger not people who are just right before retirement um i always found that i

38:22

wasn't doing much for monte carlo for them unless it's just like a very basic simple kind of um

38:29

uh you know long-term projection but um you know actually being able to communicate more

38:36

you know where their standard of living would be compared to where it is now where they want it to be um

38:41

it's still a long-term projection in terms of got the accumulation and the accumulation phase

38:47

in there so i still place less weight on it relative to um

38:52

working with retirees but i find that it's useful you can go in adjust the savings assumption now you're going to

38:58

see at retirement what that proposed income level would be and talk

39:03

about the the impact there this one specifically for you as well um

39:12

how do you determine how to set the guardrails with income lab um this advisor is used to talking with clients

39:17

about the guyton clinger portfolio based guard rails um but they have no experience talking about the income lab

39:22

type of guardrails yeah so there definitely is a difference um you know when you think about these

Total RiskBased Guard Rails vs Distribution RateDriven Guard Rails

39:29

total risk based guard rails versus a distribution rate driven guardrail

39:35

um you know it does it will be a little bit of a mental shift but i think you know if

39:41

you're still presenting previously the guy and klinger guardrails to clients in dollar terms it actually doesn't have to

39:47

be that different yeah i think a lot of times we as advisors get more caught up about

39:52

what's going on behind the scenes to getting to those numbers um most of the time when i'm

39:58

talking to clients i'm not getting into any of the details on you know how these guardrails are set

40:03

the different risk risk levels you know any of that i'm just talking in terms of dollars and

40:08

what would need to happen what would cause the spending increase or decrease and um you know it might be if i were

40:14

trying to transition from say a guidance plan or guardrail approach to that that might be a good first step is even

40:20

starting to just change that communication how you're talking about the guy cleaner guardrails

40:25

and then you know you kind of naturally just shift over uh into a total risk-based guardrails

40:33

approach um you know you can and you certainly still could use some of the other rules like things like a you know

40:38

skipping a you know inflation adjustment when you're running a portfolio um has an increase i mean you you could

40:45

layer on a rule uh like that uh to a system like this so that um

40:51

that's not really problematic in in my opinion the big difference is that you know now you're actually accounting

40:56

for social security pension income all these other sources and taxes and how that relates

41:01

in a way that is you know totally missed and you know that justin and i

41:07

we wrote about the retirement distribution hatchet and that distribution shape you see

41:13

and how that can really bias you know plan results and the fact that you don't necessarily want to use that same

41:20

distribution assumptions going through the whole retirement period uh so you know i think there's

41:26

very good kind of financial planning reasons to make the shift to

41:32

a total risk-based guardrails but um you know communication wise i would think about just kind of trying to keep that

41:38

as consistent as possible moving from one framework to the other and realizing that at the end of the day for clients

41:45

um you know the what's behind the scenes probably doesn't matter as much you might have an engineer client that wants

41:50

to dig into it and certainly you can explain it but at least for most of the clients i'm

41:55

working with i'm not getting to that level of depth anyways

42:00

thank you um next question is would you demonstrate a sample presentation of which reports you typically typically

42:07

use and how you'd frame up the discussion with a client um specifically how do you compare or contrast the

42:13

guardrails and probability of success so

Monte Carlo vs Guard Rails

42:19

um when i'm when i'm presenting a plan i'm often approaching it from a very educational

42:25

kind of perspective and it's kind of different depending on if it's a client i've done a probability of success plan for versus one that i

42:32

haven't but when i'm kind of setting that up

42:37

to explain um you know from really an educational standpoint you know

42:42

probably monte carlo is the kind of the dominant uh methodology at least the most

42:48

financially if you walked into a random financial advisor's office that's most likely the type of plan you would get

42:53

here's what it's saying here's you know why i can't just give an overview of the history and a little bit again

42:59

educational and how that's it was an improvement certainly over just a straight line kind of calculation

43:05

um but personally i'm a big fan of guardrails and then shift to some of the benefits of those um and a lot of times the

43:12

at least the typical clients i'm running plans for they tend to not be stretching their

43:18

budget as much they're and so a lot of times the monte carlo result is like 100 probability of success with

43:24

5 million dollars left at the end of the plan and i just kind of make the point you know that that doesn't really tell you

43:30

what to expect or how to adjust or how to stay on course um and it's surprising to me how many

43:35

times um i was just meeting with a physician last week going over an

43:40

initial plan and he he he beat me to it and he said oh yeah this is a very

43:45

static type of um plan it doesn't really tell you much in terms of you know what and it was kind of funny because

43:53

he was taking words from me i hadn't even gotten there yet but um you know it was clicking for him

43:59

you know it's not i'm i'm not like trying to bash monte carlo when i'm presenting that but

44:05

he could see the limitations and then when we moved to guardrails um he said yes i like this much better and so the

44:11

um that's kind of how i'm setting those up and i don't even know if that's the right thing i mean maybe

44:17

maybe i should just skip and go straight into the guardrails and not even talk about that but um

44:22

that's just kind of my educational style of presentation i kind of like to walk somebody through what's out there

44:29

help them understand if they did get a second proposal from another advisor and what that might look like

44:35

why i think there's advantages to the guardrails so that's kind of why i do both but i don't even know that that's

44:40

the ideal way to do that and then when i'm working with a client on an ongoing basis and we're working through their

44:45

guardrails i'm not even talking about probability of successor mike that's totally

44:51

gone away once we've we've got the guardrails planned in place that's where all the focus is

44:57

and i think as far as um reports um i know just working with a lot of our advisors during onboarding uh

45:04

oh there you go justin um i know we have the short-term um income plan report as well as that

45:10

long-term outlook um report seems to be ones uh two that we specifically get

45:16

really good feedback from advisors and clients justin did you have any other reports that you may um

45:21

kind of recommend advisors use if as they're maybe trying to have this discussion with a client

45:27

outside of those two um yeah if you're using pdf reports uh

45:32

those these two um that i just checked the short term income plan is that guard

45:37

rails income adjustment uh section plus some other things long term

45:43

income outlook includes that longer kind of paint the landscape view uh you know depending on the client

45:50

sometimes people will peel back the onion even more get into more details so

45:56

i think this is more rare but you can use the example scenarios to show you know kind of the stair step

46:01

view right here here's an example with stair steps up and stair steps down and so on

46:07

okay we got more questions coming in so i'm going to keep moving um next question do you have a way to

46:13

produce a report for annual guard rail changes

46:20

um let me think

46:26

there is not a report module that specifically shows that it's a good idea though we can take that on board we are

46:32

working on some things for for other displays of plan history so that that

46:37

would be included in that um and the next question is uh do you

46:42

have any recommendations on communicating with clients who have always used monte carlo approach um we

46:48

want to introduce guardrails to them but could see that um they'll question this new approach

Whats Behind the Guard Rails

46:56

i think for me that's that that could be a scenario where again i'm talking about presenting both of them showing them

47:01

side by side and talking through the um the advantages of shifting to the

47:06

guardrails uh because it's it's not um you know at the end of the day

47:12

still trying to help clients stay on track but you know this is a it's giving them parameters to actually make some

47:18

adjustments and helping communicate that and i think you'll find that once clients see that um

47:24

you know there's not going to be any injection it's oh okay this is a neat you know additional piece of information

47:31

um and how you frame that too um you know you i guess there could be questions about

47:37

what role was you know probability success previously playing versus now

47:43

i've given a lot of um initial plan presentations over the past year using

47:48

that exact uh process that i've talked about comparing the two and

47:53

not once has somebody yet asked me what's behind the guardrails you know what's actually driving i know there are

47:59

clients that will want to dive into that depth but for me um you know just talking about

48:04

the actual consequence of here's what happens if uh here's when you make that change

48:10

and most people seem to be fine going along with that and i i think if we think about examples in other contexts

48:15

like if we you know go to a doctor or something right there's all sorts of technical information that my doctor

48:21

could be conveying to me but he or she just doesn't right it's not the the focus of um you know they're

48:28

going to tell me what they prescribe that course of action for me to take and you know it um there might be some

48:35

additional discussion but a lot of times i'm not diving into that if they

48:40

tell me i need to apply a bandage and whatever treatment plan it is for a certain

48:46

injury i'm going to take their advice and and i'm going to do that and trust that there's there's a reason for why they're

48:52

giving me that so i i try and keep that in mind too that again a lot of times

48:58

i don't know the clients need that level of detail you get that engineering client of course you want to understand what's going on so that you can

49:04

can't speak to the specifics i've heard that comparison to to positions um

49:11

from some other advisors as well and i think it's a good one sometimes i've heard sort of some anxiety that clients might think well

49:18

you know well what were we doing before was that not good um and it's i think most people understand that

49:24

there's an evolution of technology there's same thing would be true for your physician right a new drug a new medical

49:29

device or something comes along we don't blame them for not using it 10 years ago when it didn't exist so

49:36

you know more static monte carlo approaches were massive improvements on street line

49:41

appreciation or a financial calculator right and so this is just another improvement

49:47

um and then this question and partially feedback are there any plans to add a feature to the income adjustment plan

49:54

for a more visually appealing way to show the um and so the example here is maybe a

49:59

picture with an upper and lower guard rail along with a dot for the current portfolio balance in relation to those

50:04

two yeah i think you mentioned the plant history

50:10

visualizations that we're working on and and that's certainly one of them that we've you know i have actually mocked them up

50:16

before showing exactly that your portfolio balance with the guard rails and you know you would see

50:21

over time the balance might be you know approaching one of the guard rails or the other yeah

50:28

and the next question is uh what's one area in income lab uh would you share with a prospective client

50:37

so i guess if you had to like pick one place in the platform to really highlight for a prospective client what

50:42

would you say for me personally it would be the guardrails it'd be talking about um you

50:48

know what putting a plan in place um you know for for the client helping them understand

50:56

and i think uh dave yeske has a good uh on the kids advisor

51:01

success podcast he's a good episode about using guardrails for clients and just the communication impact when so

51:08

many um you know he's at the experience where clients tell now this makes sense right like now they finally

51:15

um you know they've met with other advisors but they finally feel like they actually have a plan and understand

51:21

their spending in retirement i think guardrails are very powerful for that reason

51:27

um and i think that would be you know if i'm i'm only going to focus on one thing um with the client there's

51:35

you that now depending on the situation um i know the question was just for one but a second area that i think is very

51:41

powerful depending on what the plan results are but the tax center for me is a really big area to go in and show something

51:49

like the value of um you know roth conversion strategy and

51:54

um that's one where i don't i don't pitch it this way or frame it this way but like i had one experience where

52:01

it was a situation where the total dollar value was very high it was something like the 600 000

52:07

benefit to using a roth conversion strategy and the prospective client said to me

52:12

they said well that is more you know that pays your fee for our lifetime working with you

52:18

if we get this one thing right and that's not necessarily how i'm framing it and trying to position it but

Retirement Planning Analogies

52:25

it does help quantify kind of that value of good tax planning financial planning

52:30

and um you know i think actually helps people understand you know why

52:35

why it is that you know what advisors do is valuable and how um they can actually get some of that value from that so that is

52:42

another area particularly for that prospective client again assuming it not all cases there

52:47

may not be value um there but in cases where it is that's definitely something to

52:52

highlight um because it's it's another one i've seen some real impact uh in terms

52:58

of clients understanding value and willingness to go forward with an advisor

53:05

and then uh derrick this one's up for you as well but it's what's your favorite retirement planning analogy to

53:10

use with clients i probably it's probably an area where

53:17

i'm weak and i probably should use more um analogies i i do really like

53:23

the and i don't necessarily present it and present it well but kind of like the

53:28

mountain climbing i think wade fowl has one where he's talking about you know the

53:33

actually the descent right and mountain climb is actually a very dangerous part of the

53:38

process i don't like to use danger i don't like to use words like that but just the fact that you know that um

53:45

you know there is new challenges right when you're thinking about retirement planning and there's new risks involved

53:53

uh that that is one analogy that i do see myself occasionally using

53:59

again as much as i'm fumbling through it here i obviously don't do it often um i probably should use more of those

54:05

analogies but that's that's what i like you know just the whole kind of guide somebody you know being along with you

54:12

kind of a sherpa type analogy i like that as well um just to you know assist

54:17

with that journey um i think it's pretty powerful because again that's that's something that even

54:22

for a do-it-yourselfer who you know accumulated an estate on their own there are challenges that come

54:28

up in retirement cognitive decline health decline other risks that are just very different

54:35

and reasons why even somebody who you know very successfully did accumulate on

54:40

their own might still want to be working with an advisor who has their best interests at heart

Asset Map vs Income Lab

54:47

and then this next question is um so this advisor said i use asset map slash target maps initially based on their

54:54

current lifestyle cost i work up some basic target maps at low return rates which shows if they're funded or not um

55:02

any questions any recommendations for moving from the asset map slash target

55:07

maps to income lab and how to make that transition

55:13

i can speak to i i do use asset map um i've never i often will use asset map

55:21

the target maps more for like life insurance needs analysis and so i've never

55:26

leaned on it as heavily for retirement so it's not necessarily a transition i've made

55:32

but um i do um i i think you would find it's you know

55:37

pretty natural again just kind of like the evolution of here's a here's a tool that allows us to go a little bit deeper and i know that's

55:44

at least from podcasts and other things i've listened to from the asset map it sounds like that's it's very popular way

55:50

that people are using their tool is that um you know there's the what kind of light planning capabilities there might

55:55

give somebody a rough quick you know if you're on a call or something a first response on how

56:01

somebody um you know their retirement projections look but most advisors are moving into more

56:08

specialized tools for that more in-depth analysis and i would say that definitely it's the case here where

56:14

um you know the target map approach is you know just basically

56:19

straight line time value money type calculation um and you're getting something very very

56:25

different with income lab so just explaining kind of the benefits of of doing that showing somebody at

56:31

guardrails you know maybe maybe i'm wrong about this but in my experience when i've seen

56:37

um the guardrails almost sell themselves as i explain the value of it and showing

56:43

somebody that when they make that adjustment how big that adjustment is um that just seems to be i i just had

56:50

the quote i think you know lowering of the blood pressure like that really seems to do it a lot to see

56:56

what that downward adjustment would be and how far the portfolio would need to fall before they need to do that

57:03

it obviously doesn't take away the anxiety in the moment as mark is declining entirely but at least

57:08

it helps somebody know ahead of time what action they would take when they would take that and i think that's a huge huge benefit

57:16

and we have three minutes left so i'll give us one last one and and then we'll wrap it up um and then for our other

57:23

folks who um we didn't get a chance to answer your questions feel free to email uh me or our info team and we'll be sure

57:30

to answer those via email as well um but yeah last question here is uh so the historical analysis chart seems to

57:36

indicate that sequence of returns risk may be overblown um do you agree with

57:41

this comment um do you have any additional comments um around this question and uh kind of the part two of

57:47

that is uh would the advisor be able to get a copy of this chart or can we tell them what software um we use to generate

57:54

it so um i think the second part of that question is um

57:59

you can get the copy inside income lab since it's proprietary to us and that's the only place you can get this chart

58:06

but in regards to kind of this chart um indicating that sequence of returns to us may be overblown um what are your

58:13

kind of thoughts and comments on that so this this graph like we said it's

58:19

it's um in the application income lab and what's special about this is this is specific to this plan

58:27

so if these folks depend heavily on portfolio withdrawals the difference between the peaks and valleys which is

58:34

one way to look at this as communicating sequence of return risk will be larger

58:40

if they depended almost exclusively on social security and inflation-adjusted pensions that it would be a much flatter

58:46

landscape right so you actually would see the difference in sequence of return risk um so i don't know if it's

58:51

overblown i would i guess it have to i think in the sense that i talked about in this

58:57

presentation of focusing on the left tail and you know really pinning the the plan to

59:03

accommodate the worst thing anyone has ever experienced or the worst thing that is you know hypothetically possible into

59:10

monte carlo i do have issues with that but um you know i think i think it's just it's

59:16

one of the things to consider and in fact i think next month we're going to have a webinar on the subtleties around sequence of

59:22

return risk and how that's really not you know withdrawal rates and things are not the only thing to consider um when

59:29

figuring out you know is this a good or bad time to retire

59:35

all right guys well hey always appreciate the time uh you guys fit into putting up our presentations

59:42

getting the discussions together and then answering the questions and thank you to all of our users and

59:47

new folks who joined us today um please uh be on the lookout for the webinar recording as well as the invitations to

59:54

our upcoming webinars next month and up uh and just folks saying you guys did a

1:00:00

really great job so i wanted to share that positive feedback with you as well um outside of that guys thank you so

1:00:05

much i will go ahead and stop the recording and we will see you all on the next one