[Webinar] Why "Probability of Success" is Failing Retirees - February 2026

(00:05) Okay, welcome everyone to Retirement Income Intel from Income Lab for February 2026. We'll give everybody a second to get into the virtual room here. Got a lot of people joining us today, which is awesome. Um, little housekeeping as we get going. Um, this webinar is available for 1 hour of CFP CE.
(00:34)  So, be sure to stick around um for at least 50 minutes and uh to give us your uh CFP number in the uh in the uh the survey that you'll get at the end. And also let us know, you know, what you thought about the uh about the content. Let us know um any any questions you have or things that we can do for you. So, I still have a lot of people coming in.
(01:00) Um, some more housekeeping. If you can do me a favor and put your questions in the Q&A rather than in the chat, it's a lot easier to kind of track those there. And if you see a question that you want to see answered, we'll leave time at the end. I'll try to end about 10 minutes before the top of the hour.
(01:18)  Um, go ahead and give that a little thumbs up so we'll know which ones are kind of the most popular ones. Uh I hope to get to all the questions but often we can't. Um so definitely do that in the Q&A. You're welcome to use the chat as well. Um but uh we will not be uh monitoring that quite as quite as closely for questions.
(01:37) U I do have some of my colleagues Mali and Shelby here with me to help answer questions in the Q&A as we go, but I'll try to take some uh take some live questions as well. All right. So with that we'll uh we'll get started. Okay. So I I want to start today by kind of just very high level what are what are we talking about? Um I am going to be asking people today to potentially make a change in the way that you think about and talk about retirement planning with clients.
(02:14)  Now it's possible since this is an income lab webinar that we have a lot of income lab um users on the webinar. Maybe you've already made this change, right? Um, but it's it it can be a little bit surprising to people the the content that I'll present today. Um, but I really I believe strongly in it because it comes from um the main question of just what are we trying to do when we're doing retirement planning? What are we trying to provide for our clients? And one way to answer that question is to ask what our clients want.
(02:50) And there is survey research on this and I'm sure you if you're a financial adviser have had these conversations before and so you kind of know how this goes. Um you you can elicit if you ask somebody you know what are your goals in in retirement you can elicit negative answers to that and sometimes you'll get them uh spontaneously things like I don't want to run out of money I don't want to be a burden on my kids and I think that's often a sign that people are coming to retirement planning with a framing that is all about risk and it's
(03:25) all about kind of the negative side of things sort of the um they've they've heard a lot of doom and gloom or they have already encountered retirement planning that sets them up to have that view of life that what what retirement is about is going to be about not losing. But if you dig in a little bit deeper and kind of peel away that that armor of of defensiveness, what you find is that the true top priority of retirees is to live the best life they can.
(03:59) live the best life they can with the resources they have, the time they have left and the world they happen to live through. That's I mean in a way that's what we all want even long before retirement, right? Um and if you shift to talking about the goal of working with you, the goal of retirement planning or financial planning in general in this way, it can be truly life-changing.
(04:26) Um, I've had these experiences with family members where maybe they come to me assuming that retirement planning is about should I own Apple and what's my probability of success? And we start to have these conversations about well what does what does a good life mean to you? You know what ideally how would you turn your money into life into experiences? What kinds of experiences are meaningful? That's a life-changing way to change the conversation both for them because now they realize, oh yeah, that's what that's what this is for,
(04:58) right? Where this isn't just about, you know, can I have a really high account balance. Um, we're actually going to try to create meaningful life experiences with family and friends and so on. So, it's meaningful for them. It's also meaningful for you and for your teams. Um, because this is a great way to spend your time.
(05:21)  um that I would contrast with something that pretty much never shows up as a top priority in these surveys or in talking with clients, which is, well, my goal is to leave lots of money behind when I die. Again, that doesn't mean that you can't um get someone to give you a goal for money left when they die. Um this is another thing to to know about conversations with clients and planning conversations is you are showing them what they should pay attention to.
(05:51)  So if you say hey how much would you like to leave behind when they die when you die they'll think to themselves well I guess I need an answer to that. I guess that's one of the important things. So you know this definitely has happened with family members. They think well you know okay well how many grandkids do I have? Okay multiply that by some number.
(06:05)  Well maybe that. But that doesn't mean it's a top priority. Um, it's often not at all. The main goal is live the best life you can. Also, live the best life you can doesn't mean don't leave a legacy. It's just that that legacy could be certainly some amount of bequest, but it also could be a legacy of memories and experiences or, you know, I'm in this phase now where I get these invitations to um to charity gallas.
(06:36)  And you you may have been to some of these before. You know, it's usually in a big uh a big room at a you know, a hotel or a um you know, downtown or something. They take your credit card on the way in, give you a paddle, right? So you can raise it and they can uh you know take your donations and there's always somebody maybe a few people who will say you know they've worked with the conference organiz or the the gal organizers ahead of time and they say the next 100,000 I'm going to match.
(07:04)  That's got to be amazing if you're in a position to do that and you really want to have a legacy um doing that while you're alive in that kind of an environment. That's pretty cool. Um, so it could be charity. It could be making legacy with your family. Um, I know uh a family who recently had a discussion with their kids, their adult children, and said, "Hey, you know, here's an amount of money that mom and I, you know, think we can leave to you, but do you want it when we die, or would you rather kind of use that now to build some memories together?" And of course,
(07:38) the kids took the second because why? Of course you would, right? So they went to London. They saw the Vikings play over there. There was an NFL game. They saw a soccer game. They saw shows. They went to restaurants. And that then to use the terms from the book Die with Zero. Bill Perkins talks about how these experiences create what are called memory dividends.
(08:00) So they're going to talk about that trip for years and years, right? And it's going to grow in importance and love. Um so just because leave lots of money behind when I die is not a top priority does not mean that leave a legacy or create a legacy is not important. Um it certainly is. Okay. So, we will uh I'm going to basically the rest of this presentation is um is going to argue that in order to do what I just said, in order to focus on those things that people want the most and create those great experiences for your clients
(08:35) and for you, we have to move away from probability of success. And there really is not a way to save probability of success. Um and it's if you've been using probability of success, that's that's fine. No, no hard feelings. It's just it is time to change. Probability of success for those who don't know um has been around for, you know, probably at least since the 90s in financial planning.
(09:01)  Um, and it's the concept of all right, I'm going to run a, uh, a scenario analysis, usually a Monte Carlo, um, uh, analysis that's going to imagine the way the world could work in the future, and it's going to show me in what percentage of those, let's say, thousand scenarios would I still have money left at the end of the plan. And the probability of success is the percentage of times that you do have money left at the end of the plan.
(09:27) So, let's take a little silent poll. You can write these down or just remember them in your head. If you were planning for somebody, let's say they're about to retire and you are using probability of success. What would be a reasonable beginning probability of success? Now, imagine there's a market downturn.
(09:46) Maybe it's sort of the 2022 uh you know, inflation uh market downturn. Maybe it's uh the global financial crisis. And you hit refresh. you update your account balances and your plan, probability of success goes down. At what point would your client start to get worried? At what point would you start to get worried? All right, put those in your back pocket.
(10:10)  We'll come back to them in a in a couple minutes. U when we were first building income lab, we had a lot of conversations with adviserss to see what sorts of conversations they had with clients. And this was a funny one. We heard this from many advisers who said, "Well, I used to ask this or maybe I still do. Um, when somebody is, you know, coming in for a retirement consultation, how much would you like to spend in retirement?" And they always said, "Well, how much can I have?" Because this is not the normal way that we live our lives. If you're getting a
(10:41) job, they don't say, "Well, how much would you like? We'll give you whatever you want." Um, they say, "Here's the offer, and you can decide whether you could live within within your means." Right? Um and so financial planning analysis actually at least at income lab works in a way that um that tries to answer that question.
(11:01)  What how much can I have? And one way to do this is with that kind of simulation scenario analysis, right? So you're going to imagine all the ways the world could work in the future. Good returns, bad returns, good inflation, bad inflation, long life, short life, all mix it all together. every possible combination many times over a range of all these things and that's going to create what I like to think of as a cloud of possible ways the world could work a cloud of possible futures and in each one of those scenarios there is an amount that you could spend and
(11:36) exactly hit your goals and not run out of money and and spend to the max optimize your spending if I took that whole cloud of things and I put them into a graph, a bell curve graph. It's called a histogram. Um, it would look something like this. This is a little idealized. Um, so you'd have some scenarios way out on the right where you could spend a ton.
(12:05)  That's because inflation was low, returns were were high, right? Everything was good. Great sequence of returns, great sequence of inflation. you're going to have some way on the left where you'd have to spend a lot less. Um, bad returns, high inflation, and so on. And then you're going to have a bunch of stuff in the middle.
(12:23)  And it's much more likely, by the way, that you end up in the middle. But so now I've I've graphed everything together like this, and I say, well, what's the most likely answer to the question, what can I spend given this whole analysis? And clearly, it's right here. It's right in the middle. It's the one where half the time you could have actually spent more and half the time you would have needed to spend less.
(12:48) The way that we think about um retirement, and we'll get to this, half the time you'll actually get a pay raise during life, half the time you'll get a pay cut during life, right? Well, in a probability of success world, what is the probability of success of this most likely spending level? is 50%. Right? It's the median.
(13:13)  And by by definition, it is the most likely and it's the 50th percentile. What? That's not the way I think about probability of success. I think about probability of success is I want I want to succeed and so I want 100% success. Where is 100% success on this graph? It's right here. It's the one where in 100% of the scenarios, in that big cloud of possibility, I could have spent more.
(13:47) It's the one where there's no chance that I could have had to spend less. That's in other words, we're baking in predicted under spending when we drive toward 100% success. This should be for those of you who haven't heard me talk about these kinds of things before. This should be like you should feel the ground kind of shaking under your feet here.
(14:12)  What just happened? Because probability of success feels very comfortable. It feels like I understand what it means. And the reason for this is the word success already means something. It means live the best life I can. It means optimize my spending. Use my resources in the best possible way. Don't leave money on the table, but also don't overspend, right? It means get it right.
(14:39) But that's not what probability of success means. They use that word success, but it doesn't mean live a good life. It means don't run out of money. It means leave as much money. Leaving money behind is good. Spend below your means. That's what probability of success means. In other words, 100% probability of success is actually 100% probability of regret.
(15:09)  The reason I say regret is under spending, although it is not as scary of a risk as overspending and running out of money, is still a risk. It's still a cost. So, the reason for that is we, you know, we can we can only spend money while we're alive. And sometimes some of the things that we can do, we can only do while we're healthy. And so it's possible for someone to uh say no to certain opportunities because they're worried about money and then later look back and think, ah, I didn't need to be worried at that time.
(15:42) I could have I could have taken the grandkids to Disney while they were still of the age where they would want to and while I was still, you know, young and healthy enough to do it. Um, and so that's what the cost of underspending is. It's regret. That's why this matters. So why is it that we can't use probability of success to to reach that goal of helping people live the best life they can? The reason is it's it's like an optical illusion.
(16:12) You could call it a semantic illusion. So, if I ask you which of these lines is shorter, those of you who've seen this before would you're going to tell me, well, they're both the same. But you're only saying that because you know the trick. Your eyes are not telling you that. Don't lie to me.
(16:31)  The low the one below is shorter. Clearly, right? That's what our eyes tell us. That's what our brains tell us. Just knowing that if I take the little, you know, carrots away that they are the same length. it. If you go back and look again just now that I showed you that, nope. The bottom one still looks short.
(16:49)  So that's the nature of illusions, they don't disappear just because you're aware of them or because someone showed you some math. It's just the way we encounter the world. And so if you use the term probability of success or if you even any kind of um you know one-way gauge, hey, you're telling your client, here's the thing you should pay attention to.
(17:11) It's this measurement. It's this score. It goes from zero to 100. And it's called probability of success. If you do that, the client cannot help wanting it to be as high as possible. And in fact, you can't really help wanting it to be as high as possible. I know personally, having done a lot with the math of this, if you brought me a plan that had, I don't know, 60 or 70% probability of success, I wouldn't like it because I want success in the sense of abundance, in the sense of the best I can do with my life. meaningful life and you're
(17:43) saying that that's not all that likely. That's why we can't get around this. It's because probability of success is it's an illusion. It's it's misleading. So what we saw is that probability of success is actually risk of underspending. That's another way of putting it. So 100% probability of success is a 100% risk of underspending.
(18:06) So back to that question from the beginning. Uh what's a good starting point for a probability of success? We've asked this question before um just you know unscientific survey on LinkedIn. Um and you'll get a lot of answers kind of in the you know 90% range. Maybe it's 80, maybe it's 95.
(18:30)  Um but it's often in this range. And then you ask, okay, now something bad happens. we redo the plan to reflect the lower account balances and probability of success goes down. When do you start to get nervous? Uh now there are people who would say well if I was at 90 then I'm nervous at 89. But more often we get answers kind of in the 70 75% range.
(18:57)  In fact, I I think I've seen this in some Morning Star research where they recommended this kind of thing like, "Hey, if probability success gets down, you know, you might want to make an adjustment at that point." But hang on, look at where we are. We're still to the left of 50. We're still in the under spending zone.
(19:18)  We're still spending less than the most likely amount that you can spend. We have no business making people scared at this point. You're still spending within your means. Are you, you know, a little closer to spending above your means? Yeah, but you're still very I mean, you're right in the heart of the underspending zone.
(19:39) There's no reason to, this is not a five alarm fire, but probability of success, the way it's often presented, is very scary. So any motion to the right there raises people's anxiety. One reason for that is we present probability of success in a in a framework where adjustments cannot be made.
(20:03)  And so we present them as running out of money. So in this case, let's say one in four ran out of money. We're at a 75% probability of success. This is the graph you might see as a client. You think I don't this is not a scen a situation I want to put myself in where I have a one in4 chance of running out of money.
(20:22)  The fact is that's not what's going to happen. But by presenting risk in this way you're you're telling people no you could definitely run out of money. This by the way this devalues your own advice. You're basically saying yeah I'm okay with you having you know this ch that chance of running out of money. um that's unlikely to be what what clients really want.
(20:43) Another thing about probability of success and you just saw it when presented in this way with this broad dispersion of ways things could go for you is it sheds credibility. So what you just said is that I don't really know how your life is going to work out. It could be anywhere from running out of money to having millions of dollars left when you die.
(21:06)  In fact, this is a an actual output from a probability of successbased software system where it says, hey, you know, on the downside where you underperform, I think this one began with $3 million. Um, you have $700,000 left at the end of the plan, let's say, when you die. But, you know, the median, the most likely outcome is 42 million when you die.
(21:32)  and you know there's an outside chance that you'll have almost half a billion dollars when you die and presumably own like an NBA team. This is actually an output of static probability of successbased uh Monte Carlo software. And let's just step back and think of what clients actually hear when they see this. What they hear is this adviser has no clue.
(21:56) If they can't get closer than between 700,000 and half a billion, um, then this is not somebody I want to work with. Right? This is like hitting the broadside of of a barn. It's not a way to have credibility because it doesn't match the the way that they know the world works. So, what's a better option? I want to remind everybody, no naive client or prospect who's never encountered probability of success before comes to a financial planner asking for their probability of success.
(22:32) No one walks in the door saying, "I'm here and I have one really key goal today, which is I need to know my probability of success." No, that is a thing that is introduced by a financial advisor and unfortunately now it's being introduced more and more by direct to consumer um software systems as well.
(22:56)  So for example in the um in a lot of 401k platforms that have sort of a you know a a a planning system built into them they use probability of success. Um, I know there are direct to consumer software systems out there like Balden and a few others that were I just heard about that are introducing this concept to um to people who are looking at retirement or financial planning and they'll actually come to a financial adviser and say, "Hey, I saw this.
(23:24)  I liked it. Um, I want one of those from you." And I understand why they like it. It seems on its on its face like it's a it's a score that just encapsulates everything, right? it feels like a final exam score like hey you got an A minus hey pretty good you graduate. Um so it's very easy to be misled by this probability of success into thinking it's a really useful um score but but it's not.
(23:51)  And you as a financial adviser are in a position to educate clients to frame the conversation of financial planning and retirement planning and tell them what to pay attention to. It's kind of like no one goes to a um to a physician and says, "Well, I really want my LDL and HDL checked, right?" The physician is going to say, "I'm going to check your LDL and HDL.
(24:14) " Uh those are cholesterol levels, I believe, by the way. And one of them is good, one of them's bad. I always forget which. Um right, the the the physician is telling you, "Hey, here's something that matters. We should pay attention to it and measure it." Same same position that you're in as a financial adviser. Um, you could provide them probability of success and tell them it matters or not.
(24:35) Um, it's up to you. And I'm encouraging people not to use probability of success for many of the reasons we just saw. Instead, we want to make our advice more like directions. So, it's not a score, it's directions. If somebody asked you how to get um you know to you know you land at the airport and you ask you know how do I get to the hotel um you want your you know Google apps map to or Google maps app to tell you how to get there.
(25:06)  You don't want it to say well you got a 90% chance of getting there but not give you any you know real information on how to do it. Um so let's remind ourselves what clients want. They want this you know I don't want to spend too much or too little. They want to live the best life they can. They want to live within their means but not below their means.
(25:26)  They want to feel good about living their life. They want don't want to feel like they're in trouble when they're not. In other words, they want to live the best life that they can. Using probability of success leads not to getting them to their destination. It leads to not living the best life they can and leaving lots of money behind, lots of regret.
(25:46)  So, we need a framework that actually hits this other goal. this best life I can goal. And thankfully, we already have one. It's a it's a framework. It's a conceptual framework you already know from talking about investing, which is it's a matter of balancing risk and reward. There is no way on earth of avoiding risk entirely, right? Um, and it's very unlikely that you've ever met someone who should be 100% cash or 100% crypto.
(26:18)  It's more likely that you find some balance um where the the portfolio that someone's invested in is right for them, for their goals, for their attitude, for their personality, for their risk tolerance and so on, right? So, we're used to thinking about this like in neither extreme do we want to live, right? It's probably somewhere in the middle.
(26:38)  Maybe a little more toward the left or a little more toward the right. The same is true with spending and retirement. So there is a lowest spending level I can imagine you having to take. That's 100% probability of success, 100% probability of regret. There's a highest level, right? If everything works out amazing, inflation's super low, your returns are amazing.
(27:03)  You're probably also not going to recommend that they spend at that level. That is, you know, far too hopeful, right? Um, and there's a most likely answer to that question. What can I spend? Left of most likely is the underspending zone. Right of most likely is the overspending zone. Just by definition, mathematically, most people are going to answer that question, what can I spend with an answer in the underspending zone, somewhere in the underspending zone, somewhere left of most likely.
(27:33) Just because most likely is the best guess at what you can spend doesn't mean it's the best advice. Because most people prefer to live within their means and to know they're living within their means. Not well below their means, but within them. And that's the underspending zone. What this then this is just a repetition really of what we saw before.
(27:57)  As things happen through time, the risk that you're overspending or underspending, the risk that you're outspending your money, going a little too too hot, um that changes. And if things are getting bad, if inflation's high, if returns have been poor, maybe that spending level is getting a little bit riskier. But as long as it's an un on the under spending zone, we wouldn't be changing it.
(28:21)  Once we get into the overspending zone, we would. So, how do we get to that initial answer? of how much can I spend? Well, we do the same, you know, simulation analysis we were just talking about. Good returns, bad returns, good inflation, bad inflation. I will let me just sidebar on the inflation thing. Um, as I'm unaware of other software programs other than income lab that actually takes inflation risk into account.
(28:49) If you are using a system where you have one inflation assumption, let's call it, you know, 2.5% or 3%. But no assumption on whether that can vary, you are not including inflation risk in your plan. And that's that's a big problem as we know from 2022. So good inflation, bad inflation, long life, short life.
(29:08)  And in each of those situations, there's an amount that you could spend, right? So this is the same process we talked about earlier. Now what we do is pick from that big cloud a reasonable relatively conservative retirement paycheck amount inside the underspending zone. So living within your means not running too hot but not way down you know below it.
(29:33)  Right? If the minimum in that whole cloud is let's see in this graphic I guess it's 9,000 right? You're not going to say, "Well, I really think we should spend 8,000 because that's far below anything else in the in the uh that's per month, right? In inside of this cloud." You're going to pick something kind of reasonable in the in the middle.
(29:52)  Not too high, not too low. You want to allow enjoyment. Okay. So, that's the that's the answer to the question, what can I spend? The next question is um how do I talk about how things change? Right? So, we're not just giving advice to our clients at the moment of retirement and then saying have a nice life.
(30:19)  Typically, um many times we're also going to help them along the way and see how things have changed. And this is where again I'm going to encourage people to think about how we talk. The the words we use matter. The visuals we use matter, right? Probability of success versus let's find you a comfortable and reasonable spending level.
(30:36)  Um, and so I've seen people talking about probability of success using the metaphor of a plane crash. And so they'll say, "Well, hang on. I would never get on a plane that has a 90% chance of arriving, a 10% chance of of crashing." Never. Right? And that's a natural way your brain goes. If you have a 0 to 100 uh score, that's called probability of success.
(30:59) But that is not a good metaphor for retirement. Instead, a better metaphor would be something like a detour. Or if you want to stick with plane travel, fine. A delay, even a cancellation. Come back tomorrow. Come back in a week. Annoying, disruptive, sure, but not deadly. Um, and so we really need to think about these metaphors that we use.
(31:21) The message behind success and failure is the plane crash metaphor. That's where these that you know, look online. There are people who who talk about this all the time. Um, that's where that metaphor comes from. It feels so deadly to to fail, right? And you're saying to someone for anything less than 100%, which a lot of systems won't even go above 99.
(31:45)  Um, you're saying, "Yeah, there's some chance you'll fail and and you know, I guess I'm okay with that." You're also suggesting that it's possible to eliminate risk and that you can and should try to eliminate risk, but most clients know that's not really a thing. You know, nothing in life is that way. There's always some risk.
(32:05)  Um, and so this is the the messaging that leads toward those wrong metaphors. Let's talk for a second about how people understand and experience risk. um sort of based on the framing of risk. So there's a great book by uh Peter Sandman called Responding to Community Outrage: Strategies for Effective Risk Communication.
(32:31)  And Sandman is talking about how humans feel and experience a risk situation. and he has this little uh this little um risk equals hazard plus outrage equation um where hazard is what you might call objective risk. It's the chances something might happen times the you know the magnitude of the problem if it does. Outrage on the other hand is something more like a reaction to this possibility.
(33:07)  Um it's it's something more psychological, something more subjective. And by that I don't mean it's not real. It's very real. Um we all experience this kind of thing. And Sandman shows all of these oppositions between things that lead to more outrage and therefore more perception of risk and things that lead to less perception of risk.
(33:27)  So for example, catastrophic things are more outrageous, therefore more risky. Chronic things are less outrageous. example uh market crash catastrophic inflation chronic I get calls whenever the market takes uh you know more than 10% correction catastrophe I never get calls when uh the new CPI number is out just not the way that our brains work um things that are not knowable are outrageous things that are unresponsive things that are dreaded that's where I can imagine the picture of it it's a shark attack.
(34:02)  It's, you know, it's it's gross. It's it's painful. Um, things that are coerced or controlled by others versus voluntary and controlled by me. Things that are unfair versus fair. If you go down this list, and Sam, I'd encourage you to read the book. um and he's mostly talking about more like industrial uh you know maybe it's a um a factory or something like that that kind of risk but it transfers very well to the um to the the financial services world.
(34:33) So, let's think about what retirement income risk is really like, what risk in retirement is really like, and see how it uh ties in or doesn't to these framing um options. So, the success failure framing as we've discussed about it suggests that retirees either succeed or fail that risk in retirement is catastrophic.
(34:57)  Remember that graph that says run ran out of money. That seems pretty catastrophic. By the way, it's also dreaded. So somebody can now imagine, oh that's, you know, um, moving into my kids' basement. It's living on the street. It's, you know, you just let your imagination go wild, right? Um, it's it's framing retirement as static, right? If you see that red line going down to zero, it looks like, well, it's controlled by others. It's not up to me.
(35:24) I don't have any it's unfair. It's um unresponsive, right? Framing retirement in terms of how much can I spend and you know how do I adjust it going forward is very different in in other words framing retirement as a matter of directions instead of scores as a matter of giving advice on how you can adapt to changing cir circumstances um it's totally different and it's and it ties to the way the world really works which is there's not success and failure in retirement there's simply a range of possible experiences
(36:01) Some you spent a little more, some you had to spend a little less. And your the actual experience you live through will be on that spectrum of possibilities if you are adapting along the way. Another thing that's truly amazing about retirement planning is risk moves slowly. So unlike for example if you're a um like a highly leveraged hedge fund or something and tomorrow something happens you have a margin call and you're out of business for retirees um even a market crash changes risk for them certainly but relatively slowly and
(36:40) retirees have this superpower of being able to adapt to changing circumstances by changing their behavior in the future. So, for example, maybe their plan was to buy a new car every 5 years. Well, maybe they change that to every seven years and suddenly the risk of their their plan goes down. Um, maybe they eat at a a brew pub instead of a steakhouse, their their risk goes down, right? So there are things that people can do as risk changes as that you know spending level moves in the uh in that riskreward uh line that will get them
(37:17) back on track. So really spending adjustments are are are this incredible superpower that clients have. And that's the answer to this second question. The first one was what can I spend? The next one is what do I do when something changes? The answer to that is we monitor the risk, right, as advisers, and we say, "All right, if there's too much risk of overspending, if we're going too hot, right, if we're into the overspending zone all the way over on the right there, we'll consider tightening our belts.
(37:54) " That could be spending less today. It could be changing our plans for spending in the future like I just said about um you know every five years to every seven years buying a car. Um maybe it goes every 10 years. Uh I think my grandma still drives a um you know a car from like 1990.
(38:14)  So you know you can last uh cars can last a long time. Um and on the other hand there is also such thing as too much risk of under spending. Right? that's the point at which you running so cold you could live a little. And so giving somebody the understanding, maybe setting up ahead of time, hey, here's our list of kind of bucket list items that we can hit if things uh get better.
(38:37) What's great about this framing is not just that it matches reality. People know that things change. People know that they may have to make adjustments. That's another um I do sometimes get that that comment of saying my my clients don't want to make an adjustment. Well, if you show them a Monte Carlo graph where one out of four goes to zero, that's an adjustment.
(38:59) Right now, it's an adjustment. They didn't choose. It's a really unpleasant adjustment, but it's an adjustment. So, people know you could have to make adjustments. They've made adjustments in their life. But shifting from failure to adjustment framing also shifts you to the less outrageous side of Sandman's uh table here.
(39:20)  Right? So now the process is responsive. It's familiar. It's controlled by me. Um it's even knowable. We'll talk about that in a second in the sense that you can set up expectations about when you would make a change and what the change would look like. So, what we've done by making this adjustment is not just moved into a more kind of reality based um framing, but also very client- centered framing where they're not getting too much anxiety and fear, the kind of thing that shuts them down, that leads clients to choose not to retire when they could
(39:53) and want to. Um, it's moving them into a place where they feel um they feel hopeful. They feel like a can do attitude. Yeah, I can go do this. Um that's what we do by lessening the outrage. There is some research on this as well. Um so Derek Tharp um did some research um setting up sort of situations where people were presented with plans of one type or the other, a success failure plan or an adjustment based plan.
(40:23)  and then um sort of role played that there was a market correction and they were talking with their adviser again um and and seeing how their plan had changed. And he found that framing in terms of adjustments um and guard rails, which we'll get to in a second, led to less stress, more optimism, more preparedness, more confidence even in a downturn, which is a a key um a key thing.
(40:51)  and more advisor trust. Um because again you're kind of saying, "Yeah, this is responsive." Um and you're setting them up with um expectations that there will be change. Um speaking of the experience uh of change, this is another thing that we've heard from a lot of adviserss and clients, which is um like I said, people are they're very nervous about the catastrophic stuff, right? So if the market goes down, that's when you get the the phone calls, right? right? I'm nervous about this market.
(41:21)  Should we make a change? And often the advisor's response is, "No, we have a good plan. We'll just stay the course." And the fact is that might be exactly right. But if you haven't set the expectations with a client that you may make a change and what the change could look like, the client starts to think to themselves, "Well, hang on.
(41:47)  Would we ever make a change? Will I always hear this same thing? Does this advisor actually know what they're talking about or is this just kind of some hope that they have? That's why setting up the adjustment plan ahead of time is so important. It's not just what do I have and what can I spend. It's when would I make an adjustment? What would trigger a change? At what point would we be having a conversation about adjustments? So, for this plan, they have a little more than $2 million, almost 2.1.
(42:20) If they were closer to 2.2, we'd be having a discussion about spending more or at least the ability to spend more. They don't have to, right? But they should know, hey, if you wanted to, you could. If we were down to 1.4, we'd be talking about taking a little pay cut, tapping the brake on spending, making some other changes to the plan, right? Buy a car every seven years instead of five.
(42:43)  Um, maybe that maybe I did have a a legacy goal in here for the end of the plan. It was a million dollars or something. Well, you know, do I really need that? Maybe I want to take that out. So, you make some adjustments. But setting ahead of time, knowing um where those guard rails are um and what the changes might look like is huge for answering that question of should we make a change? Um we ran a um a master class uh about a year ago I think um and uh Ryan Townsley the adviser who ran some of that um was talking about the tale of two bare markets in I think it
(43:19) was the COVID crash which granted only lasted about a month but um he was using probability of success and um he happens to serve uh nuclear engineers who are very focused on you know things like probability of success success if you give it to them. Um, and found that because the probabilities of success went down, he was having to do a lot of handholding, a lot of adjusting plans, right? Because a probability of success feels like a final exam grade, right? So, if you got a 90, like, no, I'm not going to let it go to 60. Like, we
(43:54) better fix that. Let's get it back to 90. So, you're monkeying with the plan. You're moving things all around. Whereas for the 2022 kind of inflation um trouble, he was using uh the guardrail system and was able to simply say, "Hey, here's where your guardrails today. Let's remember what that is. Okay, we haven't hit it yet.
(44:18)  If we did hit it, if things get worse, this is the kind of adjustment we'd be looking at. You know, how's that feel?" And in every case, it was completely fine. Um you know, it just like, okay, yep, I understand it. will follow the plan. So you're not saying no stay the course and I don't have a plan for change.
(44:34)  You're saying no stay the course because we do have a plan for change and we haven't yet hit the trigger point for a change. Um the nice thing about this approach is also it's been back tested. It's been you know tested against Monte Carlo, against historical all sorts of things and and it works. So, I made a relatively uh aggressive plan here because I wanted to see it take a pay cut in the global financial crisis.
(44:59) Often, if you test some of these plans, they won't. Um, but what this shows by looking at, you know, tracking a plan, tracking its uh its risk level, and then making adjustments when when is when it's actually reasonable, which is you'd only make a pay cut if you think you're overspending.
(45:19)  um typically leads to relatively minor and temporary adjustments downward if at all. So what you're seeing here is a is a visual from those those you know historical stress tests uh for this plan had a $570 a month um pay cut in the global financial crisis. Um and then you know today is far above its original planned spending level.
(45:43) Um you can also stress test sort of how those guardrails changed over time, when they hit the guardrail and so on. Um and what you see here is that um this is a uh the blue line is the portfolio balance. And what you're seeing is how through time by taking pay cuts and pay increases um you can keep the client on track toward optimizing their retirement spending.
(46:12)  So if you looked at a bunch of these, this is only one example, but if you looked at a thousand of them, you would not see um you know that big spray pattern where some go to zero and some go to 500 million. What you're doing is you're keeping things inside the guardrails so that if things get bad, if they're not as good as we'd hoped, we'll trim the plan somehow and keep you on track.
(46:32)  You're not going to run out of money that way. Or if things are going really well, okay, well, we'll spend more and so we're not gonna it's not going to get to 500 million. Um, and that's that's that means you're not hitting the broadside of a barn. You're hitting more like on target, right? Um, so we're able to kind of help you optimize for living the best retirement you can through adjustments.
(46:52)  All right? So, if you're having these discussions with clients about should we spend more, should we spend less, you are demonstrating by your actions that your goal is to help them live the best life they can. Whereas if we're simply always trying to minimize failure, the goal is just going to be leave a legacy. So in conclusion, I'm asking that we stop using probability of success.
(47:20)  We're scaring people who have no business being scared in many, many cases. And shifting away from fear and anxiety like I opened with it really it it's an amazing experience. um for the client to understand what life with a good plan is about. It's about those client experiences. It makes your experience of giving advice and your team's experience happier.
(47:46)  I mean, it's just it's it's fantastic. Um it retains clients and expands wallet share. We know this from countless um you know, testimonials of people who shifted to this way of talking. And it converts prospects and drives referrals. It really is a um a win-win for everybody. And lastly, I'd say for those of you who are CFPs, um, having an explicit approach to adjustments, um, gives you the last sort of piece of the financial planning process, which is step seven, monitoring progress and updating.
(48:24)  So, of course, you're all doing this. You are monitoring progress and updating. It's just that with probability of success, you don't have an actual demonstrable documented process for doing it. You don't have a reason for advi for changing that plan. Right? In that situation where the 90% went down to 60 and then you monkeyed with the plan in order to get it back to 90.
(48:44)  That wasn't a demonstrable documented wellthoughtout process. It was a reaction to a client who was anxious about that score. So having a demonstrable documented process for step seven that is about monitoring overspending and underpending, keeping things within the guardrails, making adjustments only when it actually makes sense is really the final piece of the puzzle toward that full financial planning uh experience.
(49:11) So with that, I think we'll uh take some questions. All right. Can the chance of overspending uh be negative? Um I would say that yeah this is like you can't have a percent probability of success for example that's you know -10 or something like that um or 110 for that matter but there is a way to think about it which is you know you've got that big cloud of possibilities I can find that uh graphic again and there are spending levels that are above or below um the the uh the highest or lowest.
(50:04)  So, for example, here, you know, let's say, all right, let's say in this uh in this cloud of possibilities, I've got I see a 16,000. Let's say that's the highest. What's the risk for 17,000? Well, it's it's off the map, right? It's it's way too high. What's the risk for 8,000? Right? 9,000 here is the lowest.
(50:24)  What's the risk for 8,000? Well, it's off the map. It's way too low. And we actually do run into this um with probability of success because like I said a lot of systems will max out at 99 or maybe 100. Um if the you know hundth if the zeroth percentile the minimum was 9,000 um well 8,000 is going to have the same probability of success. So is 7,000.
(50:48)  So is 6,000. So you have no way of showing that somebody's actually spending well below their means um in a probability of success system. So that's another reason not to uh not to use it. Um let's see here. Check. Uh this one's got a bunch of up votes. Okay. Yeah, great question. And Robert asks, uh, any data on how clients tend to react to spending changes? Seems like they're more likely to cut spending, especially if it's small and infrequent, than to spend more.
(51:26)  Um, it will of course depend on the person. A really common situation that happens um with this approach is that um you will kind of build a plan with their resources. And since you're starting out by building this cloud of possibilities and picking one out that's a reasonable conservative retirement paycheck. I hear this over and over.
(51:46)  It's like probably 80 90% of clients that'll be more than their spending. And so the discussion isn't so much about pay cuts, although we can talk about that in a second. It's often about well you're spending a lot well below your means. And look, maybe that's fine, but you have to at the very least stop worrying.
(52:06)  And a good question to ask is, has have there been things in the last couple years that you didn't do because you were wor worried about money? And almost sure thing there there are. And so then the the response is just, hey, the next time one of those things comes up, let's do it, right? Let's let's let's live in possibility here. Um and so actually I would agree with you Robert with the tone of the question which is just getting somebody to sort of increase their their um standard of living um hugely that that's unlikely to be what you're doing because people are
(52:40) you know they're kind of used to living the way they're used to living. It's more about hey are there things we would actually like to do that we're not doing because we're worried. Um so that's where the spending more typically comes in. Um the spending less there are situations where people are overspending.
(52:56)  I'm sure everybody's run into a few of them, although they're not as common with people who who have financial adviserss um because they're typically good at spend at saving and and they're kind of prudent. Um but uh what what does happen more often is we have a conversation. Maybe it's not about can we trim from our spending every single month, although that might be a part of it.
(53:19)  Um it's about, like I said, making some other changes in the plan. By the way, when when things are bad enough that you hit the lower guard rail, like in the global financial crisis, um or COVID is a really good example, uh there's a good chance they're spending less already, um just because of the way the world has gone.
(53:37)  Um and so sometimes these things are are relatively automatic. Um let's see here. uh do we have real world data looking at plans that uh were completed successfully based on the plans? Um so that all of those historical stress tests I were showing are scrupulously free of of um foresight. So in any of those tests um the the testing that we're doing does not know what's going to happen in the future.
(54:14)  It's not cheating by having better capital market assumptions or anything like that. So, those are pristine um tests. Now, I get it. You're absolutely right. What you want to see is okay, but show me somebody actually using the software. And we do have that. Um it's obviously like we can't just grab people's uh you know uh personal data and show it to you.
(54:35)  But yes, this has been now tested for um you know, I think we've been had plans that were being tracked and monitored for about six years and and those have been going well. Um but I would say those those stress tests are um we're not uh you know, we don't have our thumbs on the scale on those. All right, let's see. Best way to explain to client why a uh let's see that just disappeared.
(55:06) Uh 20% reduction in asset size may only lead to a 5% spending reduction. This is a great question. Okay. So let's go back to um maybe I think this is a good one. Okay. So, um, if you began retirement here, let's say you were, you know, relatively frugal, you don't need to spend that much, right? And so, you're just saying, "Hey, let's build the plan where we're going to start deep in the underspending zone.
(55:42) " Or even if you're at 80 or 75, um, you're not going to spend less. You're not going to tap the brakes until you are in the overspending zone. And you're not going to tap them at 51 either or 49 in this case, right? You're going to tap them when you're solidly in the overspending zone where you're pretty darn sure you're overspending.
(56:04)  And the reason it took a 20% or I've seen more, I've seen 30, I've seen 40% reduction to even hit your lower guard rail is because that spending has to move all the way through the underspending zone. and it has to move all the way into the overspending zone um before you're going to make an adjustment. That's why it's s such a so far away.
(56:27) The reason for that is most people prefer to minimize the chance of a pay cut and maximize the chance of a pay raise, right? It's just the way we live. Uh you know, if we were there there probably are people who want to be a little more toward the middle. They like to live a little. They're willing to take a chance.
(56:43)  they're willing to take adjustments sooner, but a lot of people like to have it be asymmetric where the lower guardrail is farther away. Um, that's, you know, I don't know if I have an actual guardrail view here. Um, but if I go to Okay, here. Um, so why is the the upper guardrail here is closer to the 2 million than it is and the lower guardrail is 1.4.
(57:08)  It's farther away. That's why that's so asymmetrical. As for the change itself, somebody else I think asked this question about the size of the change and how likely people are to take it. Um that's the the reason that the change is small is because for pay cuts, people prefer several small cuts to one big one.
(57:32)  And so the reason for that is, hey, maybe a small cut's enough. And if it is, I don't want to overreact, right? So, I'll take three pay cuts um if I have to um in exchange for the possibility that I only need to do one. So, that's what it's about. That's just we we call it the speed of change.
(57:51)  So, if you're taking pay cuts, you want your speed of change to be small. So, you could do several small ones instead of one big one. Um whereas on a pay raise, people prefer the opposite. They want the whole thing. Hey, give me the whole pay raise right away. I don't want to tiptoe into it. Give me the whole all the good news right away.
(58:07)  So that's that's actually just a setting in our app. Um it it actually does work very well and it matches client psychology. So that's what that's about. Um lots of questions here. Only have a couple minutes. So um let's see. This one has a lot of up votes. Um what about clients want to spend more from 60 to 70 than from 70 to 80? This is a great question and I think it it um attaches to some of the other comments here which is um you can absolutely build a plan that is as customized to the client as you want and still answer these questions in this
(58:48) way. How much can I spend and what would change that? So if you want to do a retirement smile, a go-go slogo no-go years, that's all super easy to do in our software and it absolutely does not change this. Um, so then the spending capacity is just well it's what can I spend today that may be you know I might be spending less in the future once I'm in my no-go years or something.
(59:09)  Um, so yes, that absolutely could be done. It's and it's super easy to do. Um, there is a sophisticated tax engine behind the scenes here. We didn't talk about taxes today, but that's obviously super important. I thought there was a question about the risks that were Oh, yeah. What metrics are you tracking to monitor the risk? So that goes back to that same point about how customized everything is.
(59:37)  So if I changed the uh the assumptions here around inflation, if I changed the uh the capital market assumptions, if I changed the length of the plan, if I changed the likelihood that one person might die early, if I changed um whether a pension is adjusted for inflation or not, all of these numbers will change because it's really important that the guard rails be based on the the risks that this actual plan has.
(1:00:02)  So, there are some plans that have a lot of inflation risk. There are some plans who have almost none. There's some with a ton of investment risk, right? If most of your income is withdrawals from investment accounts, you have more investment risk. If you have a lot of pension income, it's less investment risk, maybe more inflation risk.
(1:00:21)  And and if there's two people in the plan and maybe one is older, you have a lot of what's called mortality risk. The risk that if one person dies, the other one won't be able to produce all this income. And so it's important if you're doing this kind of work to include all of that um and and have the plans, the what can I spend and the guardrails um react to all those things.
(1:00:42) So those are among the the risks that we're that we're taking into account there. Um so um with that uh I know there's a bunch more questions. we can look through these and um and uh and try to hit them individually if you want or um come to another of our webinars or check out income lab and we'll uh answer your questions there if it's about the software.
(1:01:05)  But um really appreciate everybody coming and uh make sure you fill out the survey at the end um and let us know what you thought. Thanks a lot.