Retirement Income Guardrails: Beyond Withdrawal Rates Webinar - October 2021

officially started let's see what we got going on

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thank you

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good morning everyone we are just waiting on folks to join and then we will get the webinar started in a few

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minutes

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okay and i do see derek here

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one and derek

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okay can you hear me okay

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yep i can hear you

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all right looks like folks are still coming in

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alrighty okay well let's get it started um again good morning everyone uh my

Welcome

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name is malcoly yabua i am the vice president of customer success here at income lab

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we excited to host another webinar for you all on today talking about retirement income guardrails

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and as always we have our awesome panelists of justin fitzpatrick and derek darp here to drive that

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conversation for all those who are on our last webinar welcome back um for those who

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it's your first time we're excited to have you here um after the webinar we will send out the meeting recording um

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and a link if you'd like to schedule a demo with our team or just uh connect with us and keep the conversation going

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um outside of that you will see that we have a q a section in the um webinar as

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well we do ask that you uh put any questions you have here and then at the end um we will actually have

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some time to uh have some q a um with our panelists as well um outside of that

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i will turn it over to you justin and derek and kick it off

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thanks malcolm thanks everybody for um for joining us uh this is uh

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one of our general webinar series on research on retirement income and retirement income planning

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and uh today we're talking about retirement income guard rails

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and this is kind of in the context of how to do dynamic income planning so how

Dynamic Income Planning

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to how to how to plan for retirement income knowing that

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change can happen and change likely will happen um so kind of making that shift from

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a static plan um where we we kind of know what we want to achieve and then we sort of set out

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and see whether we achieve it or not and if we don't achieve it um things get really bad um and and also conversely

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with a static plan um if things are going really well um you know better than expected or for many

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people you know even as well as expected we will end up with

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much much higher portfolio balances in those situations and so dynamic planning

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as opposed to static will will help clients kind of uh you know capture some of the standard of living that's

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available to them in those in those good scenarios so that's sort of the context for this

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conversation about how we can plan that way how we can plan a way that that sort of constantly

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um uh balances our clients desire for um a good

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standard of living um one that one that they can afford and that and that gives them a good life and

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any legacy goals that they have um the the conversation around dynamic

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planning has has been a very long one um in fact even uh bill bengan's 1994

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article that that uh led to what people call the four percent rule although uh he didn't call it that um toward the end

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of that article he talks about dynamic planning so so even there you know you might think of that as sort of the the

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quintessential static plan um that that's not what he was saying um

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and since then uh there's been a lot of work on okay you know what sorts of rules or

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systems could we put in place that would help us figure out how to um how to adjust income over time and

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probably uh the most widely covered and maybe

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one of the most widely implemented approaches is to use um guard rails um such that if you hit a

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guard rail you'll you'll cancel a change in income and to define those guard rails using withdrawal rates um so

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baseline what are withdrawal rates i'm sure everybody probably probably knows this but it's a good uh way to start out

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the conversation by withdrawal weight we just mean take your withdrawal your actual dollar withdrawal and divide it by the balance

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of your of the portfolio you're using to um to fund retirement um and so you know

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maybe you are following the four percent rule to begin with you have a forty thousand dollar annual withdrawal from a million dollar portfolio great um if

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that portfolio you know despite withdrawals um goes up to let's say 1.2

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million then you're at a three and a third percent withdrawal if on the other hand

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it goes down because of withdrawals or because of market performance now you're at a five percent withdrawal

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so this uh withdrawal rate concept um is kind of based in you know what is

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what is pretty standard behavior which is you know we we start spending a certain amount of money in this case

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everything is adjusted for inflation so this assumes that you're making inflation adjustments but it's sort of

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like a um a momentum uh we assume borrowing a need no one's going to make

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a change in their income so they just they just keep spending the same amount keep their standard of living um the

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same and then we look for guard rails we look for trigger points where it might be worth them making a change so as an

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example um and there are many many guard rail systems out there um

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and uh you know we're we're going to be talking about some of the some of the problems in general with

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using guard rails alone or using withdrawal rates alone to to um

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to define your guard rails um i would say we view this as you know building on top

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of this work so although certainly we have some um we'll be pointing out some some problems here um the work on on

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withdrawal right guardrails has been foundational to uh helping people understand and implement dynamic income planning over

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the years so um you know this is not meant to be polemical um anyway so

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here's an example uh it's not in any particular sort of flavor of guardrail but imagine you began

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uh retirement with a with a five percent withdrawal rate and you have a plan that says i will increase my income if the

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withdrawal rate goes down to three percent i'll decrease my income if the withdrawal rate rises to six percent

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and you know if i hit one of those guard rails i'm gonna return to a five percent withdrawal rate

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um so what would that how would that look well here's an example where we start with a fifty

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thousand dollar annual withdrawal from a million dollar portfolio five percent

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if now we reach one point seven million dollars i am now below three percent

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right so i've hit my guard rail and this plan would say it's time for me to increase uh my income up to 85 000

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on the other hand if i'm down to you know 820 now i'm over a six percent

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withdrawal rate and this plan would call for me to reduce my income down to 41

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000 so what this particular plan is doing is it it's really anytime you hit a guard

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rail you now are accepting the entire change in your portfolio balance right

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so you're absorbing um whatever that change has been right so you're gonna you're gonna reduce your income all the

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way that by by the same amount that your uh portfolio has gone down or you're gonna increase it um in the same way

Virtues to Withdraw

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um there's a lot of virtues to withdraw regardless and i think this is one reason it's been so

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um kind of studied in research and implemented um with advisors one is it's it's easy

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to manage right i mean the math i just went through you can easily do on a pocket calculator um

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i think even more importantly there seems to be an intuitive link to risk

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with withdrawal rates right it just it just feels kind of obvious that you know

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a six percent withdrawal is less likely to last my lifetime than a three percent withdrawal uh and so on

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and as i've already said you have some research to lean on however um there are some challenges

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with this when trying to put it into practice in real client situations

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um we'll go through the three that you see here

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and they are how plan length changes over time system or how how spending patterns

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um can be planned for and how to deal with income that's not from your portfolio

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but in general i would say that the main issue with implementing withdrawal rate guardrails here is although there's an

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intuitive link to risk uh in in withdrawal rates

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when you start planning in these more complex and frankly more realistic scenarios

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we kind of lose that link so it's not as as time goes on we'll see that you know sometimes higher withdrawal rates are

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just fine sometimes lower withdrawal rates are actually quite risky it really just depends on

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the particulars of of the situation so it's it's really um that's going to be

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the main problem is that although we think there's an intuitive link to risk um you know when the rubber hits the road

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we lose that link so let's start with um how plan length

How Plan Length Changes

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changes over time so um when you're trying to set retire withdrawal rate guardrails

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one of the challenges is you know to keep it simple and to make kind of client conversa client communication

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simple and so on it's easiest to uh use what i would call static withdrawal rate

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guardrails so so state them as you know similar to that example right we're going to start with

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five percent if we're up to six we'll lower our income if we're down to three we'll raise our income

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um the problem is that feels like an intuitive link to risk and it and it is at one point in

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time but this graph shows how over time

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your plan length will change because you're getting older so this is just using society of

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actuaries mortality tables you know it would be certainly possible

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to draw other curves with with other you know assumptions about about longevity and longevity risk but you can see of

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course plan like that's going down over time i might be planning for over 30 years when i'm in my 60s but by the time

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i'm in my 80s it's probably under 20 years the issue is because of that the risk

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level of any given withdrawal rate is also changing over time right because you have a different amount of time to

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cover and so what you see here is at each given success rate so i would you know using

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the language of probability of success what is the withdrawal that i could take

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at each of those points in time and you see that they go up over time as as you

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might imagine the problem is if i had static guard rail static percentage

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guard rails in place you'll see that very quickly my what i really can afford at the same

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risk level is is pushing me toward a reduction in income using those static

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withdrawal rates so for example if i was beginning life

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uh you know if i was kind of targeting a 75 percent uh success rate um i might be a little above five

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percent for these folks or around five percent um well by the time i'm into my 70s i

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if if i were looking to keep the same risk over time my static withdrawal rate

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would actually be telling me to reduce my income even though my risk has not gone up so by the time i'm into my late 70s that

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green line is already above six percent right so static guardrails

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uh although they're easy to state in client communication they can actually lead us to do the wrong thing if you

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really followed them um throughout the plan um there are certainly guardrail situa uh

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plans guardrail systems where that you know stop applying the guard rails at some point maybe in your 80s 80 85

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something like that um which which is you know a little bit of a patch to help with this situation um

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but the issue is of course it's not that you know risk suddenly stops being a thing uh at some point in the future or

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when your plan is short enough it's that risk has changed and so i think the intuition behind using

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guardrails is to continually understand what risk is and make a change when risk has changed

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uh enough to to warrant um so that's what we're seeing here is it's kind of a

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there's a risk glide path with with withdrawal rates and so if we were to try to continue to use withdrawal rate

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guardrails um they would need to be much more complex and they would need to change over time

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and unfortunately it's not just longevity longevity assumptions that are going to force us into that

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you know it's very difficult to kind of take off the shelf withdrawal rates and apply them because

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plan length um depends on you know sex and age combinations right if we're joint if

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we're single male female risk tolerance right am i am i sort of assuming i'm quite long-lived or maybe

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i'm not um those are all going to result in very different curves for those withdrawal rates and then the withdrawal

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rates themselves depend very much on asset allocation fees and expenses and so on so if we were to try to stick to

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client communication with withdrawal rate guardrails we would need um i mean in this case a

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truly infinite number of kind of tables of withdrawal rates and now our simple client communication and

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our intuitive link to risk is is uh rapidly uh evaporating

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so from a practical standpoint um it's become quite difficult to incorporate

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all of just just this nuance and still keep communication simple

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um next i want to take a look at plans where

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the assumed spending need is changing over time so this is there's a lot of research on on this and

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particular situations might vary but we're going to use as an example the retirement smile

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um this is well known from um a lot of research probably david blanchett's research on the smile is might be best

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known but there's a lot of other folks who've looked at it as well sort of how people spend money as they age

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and it turns out and this is sort of intuitive as well that you know when you're younger when you're early in retirement you tend to spend more in

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fact it may be that you have year over year increases in real spending early on but

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by the time you're in your 70s certainly 80s and 90s your real spending has reduced

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quite a bit um this is kind of

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you're you're muted justin yeah for some reason i was being muted uh just was telling me the host had muted me

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[Music] click into the chat

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okay we'll try that again um so and what this does is planning for

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this kind of um spending pattern means you can spend more early on so you're

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kind of you're not planning to spend money you never will spend later on so you get to spend it now um and so you

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see uh the effect of um planning with the smile

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um at each of these sustainability levels or success levels that we were looking at before so we generally see an

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increase in kind of the 18 to 20 percent range in in kind of income at the beginning of retirement so you can see

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given that there's a lot of evidence for this uh being you know how people actually

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uh live their lives and given that there's a a really nice um a bit of news for clients on on their

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income um you can see why this is an attractive way to plan

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however when it comes to um withdrawal rate guard rails it makes

Withdrawal Rate Guard Rails

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makes things just devilishly complicated um so

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let's imagine that we have uh someone with a three million dollar portfolio you know withdrawing 5.7

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at the beginning 174 000 a year um because that's their initial target

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right it's higher than our earlier one because we're planning with the smile well about 10 years later

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maybe they were already planning for their real spending to be 150 000.

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imagine also at that point that their balance is now at 3.8 million so it's gone up so their spending has gone

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down but that was planned and their balance has gone up

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should we take this new withdrawal rate which is now 3.9 percent and apply our

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withdrawal rate guard rails you'll notice on the left that i've increased these guard rails because of the retirement smile

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it's not at all clear we should right because the the decrease in withdrawal rate has been a combination of a planned

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decrease in spending with an unplanned or fortuitous or just nice increase in

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balance so now we have two things moving where in the past we didn't so again you could

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on top of our already infinite set of guardrail uh guardrails that we could be applying

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now you have to have guardrails that are not just based on um uh you know the beginning point

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but they have to change over time based on changes in income that you've already done based on your plan and changes in

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income that you anticipate in the future so now we're well outside of kind of the

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intuitive range of what these guardrails would be in order to handle changes in spending

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rate um and the last challenge is other cash

Other Cash flows

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flows so cash flows outside of the portfolio all the examples that we've had so far assumed that all of the retirement

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income was coming from an investment portfolio but of course that's that's not usually true

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um at the very least most families would have social security um often there are

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other cash flows as well maybe a pension maybe um you know things that aren't even

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lifetime income right maybe there's some part-time work for a while um there may be some you know plans for future

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um you know downsizing of a house or maybe there's uh you know

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a deferred annuity or something that's going to kick in later so once we have included those in the

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picture our planned portfolio withdrawals can change drastically so now it's not just

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the smile but it's these other pieces of the portfolio or of the income picture that

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are coming in and our withdrawals sort of they work like water right on top of

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a set of blocks um and so you know the the the shape of this uh

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dark blue section is uh derek sometimes calls this the uh the retirement hatchet so you

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just kind of see the hatchet shape right we initially start with the head of the hatchet we're depending quite heavily on our portfolio withdrawals and then we

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have the handle of the hatchet um which is you know nice and ergonomic because of the uh

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the smile so here again kind of like the problem we saw with the smile our planned withdrawals are changing

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over time and so we would need to account for those uh if we were going to do withdrawal rate guard rails so in this case we start with 67 000 a year

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that goes down to 55 000 a year then 24 000 and by our 90s we're actually at 10 500. so um we're

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gonna run into a lot of uh problems kind of defining withdrawal rates um

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and in particular with client communication right so early on you know the withdrawal rates at the head of the

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hatchet um they they might lend themselves to static withdrawal rate guard rails but

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you know the withdrawal rates are going to go way down um once social security starts we don't want our clients

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assuming that's going to mean they get to increase their income because those were planned with planned

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withdrawal decreases um now there is a a chance they they they do

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get to have a an increase in income but it wouldn't be just because of their plan uh withdrawal rate decreases

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um so what we need is something that that

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handles uh all of this complexity um while still kind of maintaining a way to talk with

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clients in in a simple enough way right we don't want to draw them into all the complexities of the smile and uh and

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lung deprevity changes and mortality tables and and so on if we don't have to but we need a measure that includes the

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effects of changes in portfolio balance um uh all of the complexities of you know

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longevity assumptions and preferences asset allocation plans but also planned

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spending changes and other cash flows and there actually kind of is a way to

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do that which is just to use talk about

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guardrails in terms of risk and and to keep it at that level of abstraction

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um so risk to retirement income is the chances that that retirement income

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is is not sustainable so that that retirement income plan is not sustainable and therefore that

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it would require a an adjustment a downward adjustment so risk is chance of adjustment

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um the nice thing about this is we can say things like

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okay we'll start at a level of risk that you know is x right which we've determined with you is is comfortable

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but if risk goes up enough that it's not comfortable anymore we'll reduce our income if risk goes down enough that that

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frankly you know you just it's belt in suspenders time then we'll let you know that you can increase

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your income and that can be the conversation total risk guard rails would be stated

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as something like what you see here you know okay we'll start at a 20 risk if that risk goes

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down to zero we'll increase our income by x if it goes up to 60 percent we'll

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decrease our income by y and x and y could be anything here right could be a dollar amount could be a percentage

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could be you know going back to well we'll return to 20 it could be all sorts of things and the other nice thing about

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total risk guardrails is the the complexity of the calculations the analytics um

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that can all it can be many different things you can include lots of different things without having to bring the

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client communication into that all that complexity um there actually are um

Probability of Success

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you know even using sort of probability of success type ideas this is at least in principle

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possible although practically it would be quite difficult um but

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you can always build for any plan for the future it's always possible to build a picture

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of you know what income is available at each at each risk level right and as

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risk goes up income go up as risk goes down income goes down or vice versa as

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um as income goes up risk goes up right so it's always possible to kind of draw it

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back to income and therefore drop back to withdrawals because you'll know okay if i have ten thousand dollars in income

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and six thousand is from social security i'll need four thousand from withdrawals right but that's an output of the system

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the withdrawal rate not an input in that situation what we're depending on instead

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is um is viewing risk in a holistic way

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um that's uh that's the end of my presentation but i know derek has been thinking about this as well so i want to

26:24

see if he has some comments to add sure yeah i mean i just think

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in terms of you know really improving what we're communicating to clients how we're presenting those results

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it's a it's a very big difference to go from talking about probability of success that really it's abstract it doesn't

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really tell somebody um what they want to know versus putting things in dollar terms

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and you know here's how much you can spend here's when you get a pay increase here's you when you get a paid decrease

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when i communicate and it's been a shift for me um and how i'm talking to clients but when i've changed that

27:00

um sometimes i'll even present the two side by side and the message from clients is you know the guard rails really resonates with me

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that's that's the plan that um that makes the most sense to me so i think it is just such a better way of

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communicating um i think there's actually analytical

27:18

advantages too but um you know really at the practical point of actually

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delivering results that are meaningful to clients i think it's a it's a big improvement

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yeah i guess i didn't mention that um it it's not just communicating at the

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level of uh of risk right so we are we did you know i have this uh example right here okay you know risk

Setting Expectations

27:42

and percentage terms and and that is a nice level of abstraction right people kind of understand okay it's overall

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risk it's gonna include everything but derek's point that what you can then do is actually set expectations um

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so you know at each point i can i can uh i can ask

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um okay what would my balance have to be you know today

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for my risk to be zero percent or what would my balance have to be today for my risk to be 60 right i mean

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i know my risk today is 20 right maybe maybe my 20 risk income is 10 000 a month great but i can ask

28:20

what would the balance have to be for my risk to be different and that i can communicate those to clients um so i can

28:26

say well you have a million dollars today you know if it was

28:32

1.15 million this plan would be saying you can increase your income

28:38

if it were you know 800 000 this plan would be saying it would be time to decrease your income

28:43

and you can even tell them how much right so assuming you've decided on what x and y are here maybe

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it's returning back to the 20 level you'd say okay and this would be how much it would be so again

28:54

like derek was saying i think it's a really good point talking in dollar terms is always something that's a little bit more understandable than

29:00

percentages you know probabilities things like that yeah and just to add to that i think the

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the amount of peace of mind that comes from a client understanding because there's always that fear

29:11

in the back of their head of you know what happens if the market falls am i gonna run out of money what does

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that mean and so understanding okay the market could fall to whatever level and then at that point i

29:23

would need to make this particular cut just giving that sort of clarity i think provides a lot of peace of mind because

29:29

now they know when an adjustment may be coming and they know how big that adjustment is and oftentimes it's not

29:34

the drastic um you know they're going to be running out of money adjustment it's just a minor uh

29:40

cutback to um you know pull in their spending for a while and then continue to monitor the

29:46

situation yeah so and i know where i like to keep these to about half an hour to leave time for um questions but i i did want

29:53

to mention a lot goes into your into into this picture

30:00

right so you'll notice you know if i'm if i'm starting out with a risk of 20

30:05

i'm building in a buffer right because in in this in this world right where i know

30:11

okay i'm trying to i'm trying to estimate how much you can afford um

30:17

keeping risk at you know 20 percent is it's well below 50 right the 50th percentile that sort of should be our

30:23

best guess right so we're building in a buffer there and so that's often if you do build in that buffer client

30:28

communication like derek says can you can really kind of set people at ease

30:34

and then choosing how to adjust again there's a lot of flexibility here um so often you

30:40

know what we tend to see is uh on the income increase plan right if my

30:46

my risk goes down um people probably want to bump their income up you know go ahead and just just put me back where i

30:52

was right put me back at 20 or something right like give me give me all that uh that i can that i can afford here

30:57

whereas on the decrease plan you have a lot of flexibility right so you can say well you know do i want to fully refill my

31:03

buffer by you know taking a big decrease in income that's probably going to mean my risk you know is certainly

31:10

much lower but it's a harder pill to swallow or you could say well you know we're going to take some smaller steps

31:15

and then see see how that happens there may be more i might maybe calling you with more adjustments over time but at

31:20

least we won't overreact right and people um wouldn't necessarily like a decrease in income so there's a lot of

31:26

flexibility here um in in defining how you behave with these total risk

31:32

guardrails so again just to just to

Conclusion

31:39

wrap up the presentation uh this as derek was saying it tends to be actually quite easy to communicate and

31:44

if you can focus on dollars it may actually be easier than withdrawal rate guardrails to communicate

31:50

because it's it's at a higher level of abstraction the biggest benefit is it really handles the complexity of real life all the

31:57

things that we were just looking at and so it keeps your advice kind of on track right there's there's

32:02

no points at which you uh like we saw with the longevity changes where you

32:07

know natural drifting of withdrawal rates that you could handle could accidentally trigger the wrong

32:13

thing right you might you might be counseling a reduction in income when really uh you know even an increase in income would be fine

32:19

um and it keeps the communication at the right level that's traction the challenge is this is

32:25

really hard to do you know with a it's impossible to do with a uh with a a a

32:30

pocket calculator um it would take it takes a lot of manual

32:36

guess and check with kind of standard systems um income lab is obviously focused on providing the the

32:42

analytical tools to do this easily um and because of this complex set of

32:48

factors that's involved um you know it can it it takes a little bit more to understand intuitively what's going on

32:54

but of course that's that's kind of why clients have advisors um so with that let's uh let's take some questions

33:01

and um justin uh we had a few come in the chat and so um if we could go to the

33:07

slide where you're showing the correlation between withdrawal rates and income i think that was like uh your

33:12

second or third slide um just a kind of a clarification question

33:19

around um you know why is an increased withdrawal rate correlated with a reduced income and they were wondering

33:26

if you could kind of explain that a little bit more um i'm not sure which

33:32

spot it was if i i may just have misspoken actually because that doesn't sound uh

33:38

right and i think it's the next slide from this one it sounds i'm looking in the

33:44

chat right now okay there you go so um

33:53

okay oh i think i know what the question is so okay so at a higher success rate

33:58

you have a lower income right that's what this is trying to say so the blue line

34:04

um here is the one with the lowest income all the way along right even as i'm much older and my plan length is

34:09

much lower if i wanted to have let's say a 50 success rate or um

34:15

i can take a much higher income right because i'm basically taking on more risk and when i want to take on more risk i take on more income

34:22

so that's that's what's being shown here

34:30

and then um kind of following question with um later in the presentation there's a question around uh so does

34:37

spending or income um would only go up if the risk went to zero percent um

34:43

and they were kind of speaking more about your example but they're wondering if there was a recommended best practice

34:50

around kind of increasing spending when risk went down to zero percent or if maybe there's a different level um

34:56

that you recommend for them to increase income this is a really good question so it's a

Target Levels

35:01

it's around you know this is just meant as a as an example it's not meant as a crazy example it's meant as a reasonable example but it's definitely not saying

35:08

hey this is what everyone should do um but there is a really good question of you know what should each of these

35:13

percentage values be or what are reasonable amounts for them so the the target level really has a lot to

35:20

do with this trade-off between a client's um you know desire for a higher standard

35:26

of living right now and their ability to have that standard of living be be flexible right so it may be that they could

35:32

accept a higher initial risk right 20 is relatively low that's sort of similar to a 80 chance of

35:39

success right um but they may be fine with 30 40 50 risk knowing that

35:45

they get more income today and they're comfortable with reducing it if they need to in fact the reduction might

35:50

might be back to where it would have been at 20 right so they sort of well let's try it but i'm going to keep my

35:56

lifestyle up to the point where i could pull back um so you can have kind of a an intelligent informed conversation

36:02

about what that looks like as for the the triggers themselves

36:07

um the reason these aren't you know really tight around that 20 number is

36:13

again most people just would prefer not to make lots and lots of changes all the time so we kind of want to play things

36:19

out long enough that okay now i feel like a change is warranted you could certainly build a plan that changed you

36:25

know all the time by keeping it really tight but just in practical terms that would be really hard to administer and i'm not sure clients would um

36:32

appreciate it moreover we've done some um kind of optimization work on this um

36:37

you know exploring the the full range of of possible ways to do this and um

36:43

letting things play out a bit actually is often advantageous um so in this case if risk is going down

36:50

um you know if it goes from 20 to 19 you know we probably don't want to just you

36:55

know pull the trigger and make an income increase like let's see is this is this risk gonna be going down for a while

37:02

right so i think you know putting it down to ten zero even less than zero right those are those are all possible

37:09

trigger points and then on the upside um

37:14

or sorry on the downside so the decrease how high should risk have to go in other

37:20

words how low does your portfolio have to go to trigger a reduction when you're viewing things in this way

37:25

where you know it's it's it's dynamic uh income right we're not sticking to

37:30

one particular income come hell or high water um it

37:36

is if you think about it prudent to set that guard rail at at least 50

37:43

probably higher because any risk that's lower than 50 is is actually saying hey more likely than

37:49

not you're fine right if you even if i have a 40 risk more likely than not i'm not going to

37:56

have to adjust and so to make an adjustment in such a situation would be you know again it

38:02

would be extremely it'd be being extremely careful right you're saying hey it's still

38:07

things are still uh you know better than a coin flip in my favor but i'm gonna adjust anyway i'm gonna you know pull

38:13

back anyway because i'm scared um you can certainly build a plan that way but often what we see is you know things

38:19

above you know risk above 50 is where you start um and again in that work we've done

38:26

being able to wait kind of let things play out see if this really is you know

38:31

going in the wrong direction before making an adjustment is usually in clients best interests at least in

38:36

simulations um because you know overreacting adjusting

38:41

too much although it definitely keeps risk in check there's a cost right it lowers people's standard of living so we don't

38:47

want to do that unless it's pretty clear we have to and then this one goes back to um the

Sustainability

38:54

slide with the flat versus smile percentages and they just asked if we could spend a little bit more time reviewing um the

39:01

information in the slide and also with regards to the sustainability percents

39:06

is the chance of adjustment so 50 sustainability does that equate to 50

39:12

chance of adjustment in the future yeah i'm sorry for the the um you know flip-flopping on terminology here

39:18

sustainability level you could say that as probability of success so just flip it around to get risk level so um you

39:26

know 100 sustainability is zero percent risk 90 sustainability is 10 risk

39:31

and so on um so what you're seeing here is um

39:37

you know just very simple plan um all of it all of your income coming from

39:43

with withdrawals from a portfolio um i think this was a

39:50

30-year plan i can look at it again um and just saying at the beginning of the plan how much would i be

39:57

withdrawing from my portfolio and then adjusting it both for inflation

40:02

and for these planned changes in withdrawals so actually if this is in real dollars but

40:07

if i had shown it in you know future dollars you wouldn't see such a decrease it would you just see sort of it would

40:14

stay flat and then actually go back up at the end so this is this is saying all right if i wanted to have a you know 90

40:21

chance of success i would begin this plan um

40:27

you know with fifty one thousand dollars from a million dollar portfolio if i were following the smile but i have forty three thousand dollars from a

40:34

million dollar portfolio if i were not if i were keeping it flat and just adjusting for inflation

40:41

and the next question is asking does income lab and calculating projections factor in changes in

40:48

longevity for clients and then kind of the follow question was around derek's comments with working

40:54

with clients with probability of success and the income live guard rails approach um they just recommended that it'd be

41:00

nice to see a client presentation if we have anything like that that we can um

41:05

that we can show which i don't think we do but i think that would be a great um kind of future topic

41:11

yeah that's a great idea kind of we could show um like an example of how to how to present this yeah i'll take the

Dynamic Longevity

41:18

first question real quick and then i'll turn it over to derek um so yes the the dynamic nature of

41:24

um of longevity is included in all the plans on income lab so

41:30

you know say you chose kind of a 30 longevity risk you're basically saying hey i want there to be a 30 chance

41:37

uh that i will outlive this plan or in the case of joint i want there to be a 30

41:42

chance that at least one of us will outlive this this plan um in other words you know i'll i will attend

41:48

you know uh 70 of my friends funerals um

41:53

so that's that's built in so if you're if you're tracking a plan on income lab we call it implementing a plan then this

41:59

this happens automatically um so the plan length changes over time for you you don't have to recalculate it

42:05

and then when the plans are tested in our plan test feature which is kind of a

42:11

super heavy duty uh you know simulation of following a dynamic plan throughout

42:16

that test it it knows that you will change your longevity assumptions over time

Presentation

42:24

um derek i know if you want to talk about kind of how you present the um

42:29

yeah um for for me it really i'm pulling out the guardrails the high level information um

42:36

a lot of the things i'm presenting visuals and charts and other things from income lab i'm going to be pulling you

42:42

know to illustrate a tax concept or something specific here's how doing a roth conversion strategy here's the

42:48

value from that and here's how that works so a lot of times it's actually those components that i'm doing

42:54

pulling more of the visuals and having actually a longer conversation about the presentation of the guard rails

43:01

um is really pretty simple in terms of you know this is uh you know i give the guardrails example

43:07

you know guardrails are keeping a car on the road keeping the path on track um

43:13

just kind of explain the concept and then present the numbers um from the

43:18

income web output i do round them off so i guess that's one kind of change that i make i'm often

43:25

if you're looking at the output now you would see you know out to the specific dollar i like to work with round numbers and say okay 1.2 million

43:32

instead of one one really precise number um so that's one minor modification i

43:40

make to that but pretty much just presenting that output and here's the um the current spending level the

43:45

initial here's a portfolio value projected at that particularly it's pre-retirement um and then here's the

43:53

spinning uh the threshold and the increase um for both the upper and lower guardrails so

43:59

pretty pretty simple presentation really got it and the kind of follow-up question for you there on that um is you

Inputs

44:06

know when you work with clients what inputs um are you most commonly using for the initial target income risk and

44:13

the trigger percentages um in the software for increasing and decreasing uh income

44:19

yeah so it's it's still um for me is kind of a getting comfortable

44:25

with i don't i don't have the levels that i'd say like are my

44:30

purely uh ideal i'm still trying to get to understand levels and get to feel comfortable with them i i feel fine

44:36

using the default built in so that's usually where i'm i'm starting and if it is a

44:43

client situation where i want to see you know more

44:48

i know somebody's very conservative or the plan is just really high sometimes i'll even bump it to a conservative setting just because

44:55

the client's very frugal i know they don't want to spend they want to spend 4 000 a month not 10 000 a month even though they can so maybe i'll pl show

45:02

the more conservative plan anyways just that much more kind of built into this precaution

45:08

but i'm comfortable using the defaults there um in some of my kids writing and stuff

45:14

that i've done exploring these ideas i've often played around with

45:19

more not because i think it's ideal more because i think it fits within an advisor's

45:25

current mentality and framework you know starting with say a 90 probability of success

45:31

increasing spending if it gets to 100 percent sorry i i still flip around the risk and the probability of success but

45:38

increasing if it gets to 100 probability of success and cutting if it falls to 70

45:43

i don't think those are necessarily ideal um i just feel like that's pretty much what a lot of advisors are

45:50

doing anyways so from a modeling standpoint to get comfortable with it it might help

45:56

to start there but one of the things i have my the 50 probability of success

46:03

um article at kitsis where what we really found using income lab to

46:08

run the analysis there was even if you play with those numbers um

46:14

you know targeting like a constant 90 probability of success versus a constant 50

46:19

probability of success is not that different um if you're making those ongoing adjustments you're just

46:25

shading income a little bit higher when you use a lower probability of success as your target so

46:32

i think there's going to be a period of education and even for myself getting comfortable thinking in terms of 50

46:39

probability of successes is reasonable like that it just goes so against um everything

46:44

that's been you know the way i've practiced and seen other advisors practicing but i think it's right um and so i'm still getting

46:51

comfortable with those numbers but generally just using the default it's built in yeah in the defaults you'll see there's

Defaults

46:58

there's nine default settings again you're welcome to go into the event settings and set all of these uh

47:03

variables yourself but the the most conservative level has a

47:09

target risk of zero percent or 100 percent chance of success and then the most

47:14

i forget if we call it aggressive but the most aggressive preset is actually 40

47:20

risk so 60 chance of success so it actually never even goes up to 50 on the defaults again you can go in and do that

47:25

yourself um but that's uh those are what the defaults are and then the the default guard rails

47:32

follow this sort of mentality of well let's not have them too close because then we'll we'll move all the time we want to kind of let things play out and

47:39

let it become clear that an adjustment is warranted justin you kind of answered this next

47:45

question so i'll just have you got to finish it off um it was really asking you know where in the software can

47:50

advisors access the advanced settings to dial in the plan's um you know success

47:55

percentage um and yeah so kind of where would they

48:01

actually make those changes in the advanced settings which i think this kind of topic gets us into uh

48:07

previewing our user one of our upcoming user webinars as well um yeah if you could just talk more about it

48:13

i should have pulled up the platform um and had an example for everybody uh on on a couple of things here um but

48:20

yeah we do we do plan a user webinar on i'm kind of setting guard rails and talking through these um

48:26

you know all these different uh things that can be adjusted but it's if you're in a plan um there's three little three little

48:33

dots uh menu at the at the top um hit that hit advanced settings and then

48:39

there's a whole income settings section a little accordion section open it up and um by default you're using those you

48:46

know those nine presets um nothing magical about those but they do tend to work pretty well um and so you can hit

48:52

you know customize and then you know go to town uh the only the only restrictions are that you know

48:58

your the guardrails have to be on either side of your target right you can't you can't have both guardrails on the

49:04

same same side yeah and i think um you know as we mentioned that'll be one of our upcoming

49:10

user webinars so we'll even go into deeper detail um for the folks who are really interested um in in kind of messing with

49:17

the advanced settings uh going from there we had um a few q a questions just asking about um

Questions

49:24

and let me see if i understand it so i think it's confirming that the the advisor like to confirm if the portfolio balance asset allocation

49:31

spending changes and other cash flows if there are risk factors behind the total risk guard rail strategy

49:39

yeah so a way to view it is um like the way that you get a total risk

49:44

number is you you take everything about the plan asset allocation um

49:51

fees planned spending changes planned you know future cash flows maybe social security starting at 70 but i'm 62 right

49:58

we take all that into account and then you can say okay at this point in time

50:04

tell me the the income i could have at any any given risk level um so

50:10

now we're talking about income rather than withdrawals right and then like i said before you can figure out the withdrawal from that income number by

50:16

just subtracting out the stuff that's that's non-portfolio so so yeah total risk you know in our software is always

50:22

with every single thing that's that's uh that's in the plan um it goes into figuring out total risk

50:29

so you make a a small change asset allocation change a plan length you know

50:34

a longevity change anything like that everything everything will change

50:39

um and the next question is is there a time lag built into the software when there is a market crash or if the

Time Lag

50:46

client's account values are below the cut off in one month it uh does it immediately notify us um that a spending

50:52

cut is needed so just kind of this is a really great question um

50:58

it's kind of you know what's what's what's the right cadence of tracking people's income plan um so we already

51:04

talked about how you know people aren't gonna prefer neither advisors nor clients are going to prefer like constant you know

51:10

daily changes or something or even monthly um i'll give you an example so some

51:15

changes are just inflation adjustments right so we track inflation and we're tracking how much

51:20

an income level has you know the purchasing power has gone down but you're not going to call them every month and say hey i'm going to

51:25

send you two dollars more this month um so what's the right cadence to do this in

51:31

and what we found is you don't want to do it too often monthlies probably as often as you want

51:37

to check and you want to set those guard rails and sort of the the hurdles

51:43

wide enough that you that you're not going to be changing all the time so that's what we do for any plans that are

51:50

implemented that are being tracked on income lab we rerun them once a month um

51:56

now it's certainly possible that the day we rerun those happens to be you know the day of a huge market crash um but

52:02

because we're only running them once a month that's not as likely um and even so if there's a buffer built into a plan

52:08

that doesn't necessarily mean that you would have a um an adjustment on every plan or that the adjustment would be

52:15

would be large um derek do you have any thoughts on on that yeah i mean i think from a practical

52:21

perspective i think as an advisor it's nice to get that monthly check-in and update

52:26

um it would would i go out and it would kind of depend on the nature of the downturn and

52:33

what triggered it and if you know we're back in the beginning of the covet type situation am i going to run out and tell

52:38

everybody to cut income right away i'm probably going to wait and see you know at least a little bit to

52:44

probably more talking about keeping clients invested at that point in time um and really trying to wait and see on

52:51

the income plan where that's going to go if it stays calling for you know a cut for three months or

52:56

something then maybe then it's time i i would love to see some more research on

53:02

you know the way to optimally do that i don't i'm just going off of intuition here but just in practical terms i'm probably

53:09

i don't want it to just be a quick swing in the market tell us tell my clients they have to cut their spending and then things come back and

53:15

we're we're not in a prolonged downturn so um that's just kind of my my quick

53:20

thought on that yeah i mean we've lived through one of these recently now it was a very quick one right um back in february march of

Timing

53:27

2020 um and i'd have to go back and look but i don't believe many many plans on income lab had an adjustment

53:34

now again the timing so we rerun plans um when all of the data for the last month

53:39

is in which is not necessarily on the first of the month so we have we consume a lot of different data um so it tends

53:45

to be um uh you know about a week into the month um depends on the number of business

53:51

days in the month but um and in that case you know it wasn't that we ran all the plans you know at the

53:56

bottom of that uh at that um at that market now if you're not tracking a plan

54:02

and and and you're just sort of designing plans playing around and so on you can you it's it's up to you how

54:07

often you want to rerun those and see how much things have changed but so you you could do that

54:13

um but again i think as derek said we we'd like to do some more research on this cadence

54:18

the small amount of research we've done suggests that being more frequent than monthly would not necessarily help in fact it might

54:25

hurt perfect um and so this next one is kind of two different scenarios around using

Scenarios

54:31

the retirement smile so i'll go through the first one and let you guys answer and then talk go through the second one

54:37

um so with the first scenario is um you know if you assume uh using the

54:42

smile spending the age-based spending path um and say that is 85 to 90 years old

54:49

will the program assume the spending will be on the back end of the smile um you know as we'd expect or would it

54:55

assume a truncated whole smile so it'll it'll there's a couple things

55:00

that go into the shape of the smile and one is your age so you know this is um i

55:06

believe it was for that 65 year old couple um well i can't guarantee it was um so

55:11

let's say that 2021 is 65 um you know if you were you know 85 then the shape you

55:18

would see would begin at you know what you're seeing for 2041 here um so you

55:24

wouldn't see this you know initial hill it might be fairly flat with a rise um toward the end so that's

55:32

one of the main inputs to this shape is your age

55:37

another is your desired income so you know the more kind of discretionary income the more income

55:43

that you really want the the more you tend to the you know the more curve there is here so

55:49

you have if you have fairly low income um there's not as much curve basically because there's less to adjust

55:56

and then with the second scenario is really kind of talking more about the um kind of real-life experience of

56:03

implementing a plan that then calls for reduced spending and so uh the question

56:08

is you know they can imagine clients balking at the advisor with the advisor saying it's time to

56:14

implement a spending reduction um and they're wondering if um maybe derek if you've had any experience

56:20

with this or justin um you know just any thoughts on kind of the real life um

56:25

aspect of having that conversation with a client yeah so i think you know in

56:31

practical terms one thing that's important to think about is yes we're seeing um in real terms

56:37

spending go down but often it's not true in nominal dollars right throughout the smile and so it's really more likely

56:45

that their income is just actually kind of staying the same rather than a significant decline

56:51

so um that's why in practice i think a lot of people also don't feel like wait my spending doesn't go you know a the

56:56

water retirees feel like they haven't been decreasing their spending but even if they're keeping it flat and just not

57:02

keeping pace with inflation that's a real reduction in spending so in practice i think that's part of it um

57:08

you don't see it that way um and then there's also you know you

57:14

you have the option of running um you know with with the smile or without the smile and i would say

57:20

for most of my clients i i'll look at it both ways and it's really the clients that they're really stretched and

57:26

financially in terms of you know their how how can they make retirement work and

57:33

that's the case is where i'm more inclined to use the smile and sometimes for clients i'll just you know use the

57:39

flat even though the smile is probably more reflective of their actual spending um and then they're not going to get

57:45

that same sort of impact so you have the flexibility as the advisor you know in terms of what you're doing

57:50

and how you want to use the tool you know uh i had an article on

57:56

think advisor a week or two ago uh and i think one of the examples was uh a 19 it was 66 retiree which is one

58:03

one of the worst times to retire in history um but it was a time of really high inflation and in order to keep them on

58:10

track they ended up with one reduction in income so in actual dollars nominal dollars that they received and

58:17

they had two less than full inflation adjustments which are you know reductions in spending power but they

58:22

don't that's not how it's interpreted by a client so three reductions overall but only one of them was in you know

58:29

actually saying hey it's ten thousand going down to nine um and that saved one of the worst times in history

58:35

so i i agree with derek that when you throw inflation in uh sometimes this is

58:40

actually a little a little easier to handle um and then the other is um a lot of these plants have big buffers built

58:46

in so so it really takes quite a bit for you to be calling with a reduction

58:51

in income and you've set that expectation ahead of time and it's if if if things have gotten that bad it's it's

58:58

possible maybe even probable that the clients are actually expecting something worse than you're going to suggest you know this is

59:05

the 2008 2009 or you know we saw earlier with withdrawal rate

59:10

guard rails like they might expect that they have to reduce their income by as much as their portfolio went down which

59:16

may not be true because of all these changes that that the other changes that have happened perfect and i know we're up on time we

59:23

have one last quick question um that i'll throw out there and it just says uh where does the program pull the

59:29

portfolio data from for each plan and uh is there an integration or is it a manual input

59:36

uh yeah it it depends on you know what other software you have in your in your tech stack so um we have an expanding

59:43

list of integrations that you can pull it from um i'm not sure i can remember all of them right now but black diamond blue leaf

59:50

red tail riskalyze there's a few that are coming on board right now um

59:55

bridge ft and through them schwab td fidelity anyway there's there's quite a few and

1:00:02

expanding so if there's one that you need or would like um definitely get in touch with us and we can see what we can

1:00:08

do um well

1:00:15

thank you guys so much i know we went a little over um and so i will kind of

1:00:20

wrap this up but um you know for for the folks on the call still we appreciate all the feedback and

1:00:27

the comments uh please keep them coming if you had a question that we didn't have time to answer um please reach out

1:00:33

to us and we are more than happy to set up a meeting and walk through your questions and uh be on the lookout for

1:00:39

the meeting recording to come out tomorrow and uh for the invite for next month's webinars

1:00:45

outside of that justin always a pleasure and thank you so much for taking the time and we'll uh see you on the next

1:00:54