Using Economic Data to Inform Retirement Income Advice - July 2022

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okay looks like it's sponsored all right good morning everyone thanks

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for joining our income lab webinar this morning we're excited to bring another great topic hosted by our two presenters

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justin and derek before i kick it off to them just going over some quick household items we will

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have the first half of the webinar will be the presentation and then we will open it up for q a after

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credit for attending this webinar okay all right guys so that's my field to

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start this off justin derek i will turn it over to you guys and i'll be back for the q a

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all right thank you malcolm thanks everybody for uh attending hope your summer's going

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well um today we have um uh i think a pretty timely topic which

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is how um to think about using economic data and economic context when

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developing retirement income advice it obviously seems more relevant or

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important right now but it's always important but now because of you know higher inflation and uh some turmoil and

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equity markets this is probably something that uh that a lot of you are thinking about a lot of your clients are

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are thinking about so hopefully this will be uh timely and and helpful

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the way that we're going to do the presentation here is first we'll kind of go through three examples

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of types of economic data indicators that can that can help

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in providing context for retirement planning um i would think of these as families of indicators and and and also

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that these are not the only ones that might be helpful um so think of these again as as examples not as you know

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the only things to look at or exactly you know the mathematical key to uh to determining retirement um

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advice um so we'll look at price earnings indicators

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um something i'm calling nest egg you'll see what that is and uh inflation which is probably on a lot of people's minds

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then we'll talk about um when you know what types of plans are most uh

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helped by applying economic context um and and then probably most

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importantly is the third thing which is how we might include economic context in client communication about retirement

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planning uh and then finally we'll dive into some of the analytics surrounding

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how you might tilt retirement income advice based on economic context

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and on that last part i think whenever we talk about applying

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economic context market context to advice it's reasonable to get a little

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bit um you know worried that you know is this market timing is this the kind of thing where there's really you know evidence

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to show that these are strong um i think you'll see throughout that the the data shows that

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the longer uh both the longer the plan that we're applying this to and the

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longer the uh the economic measure is um in terms of

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you know sort of how quickly it moves so we want it to move rather slowly um the the

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better um these indicators are for um for helping provide better retirement

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planning advice so this isn't really you know the equivalent of of day trading or stock picking

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it's it's much more about kind of long-term long-term strategic

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positioning in retirement income planning so let's start out with our three

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examples um so the first is probably the most well-known so um and people a lot of

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people have written about this i know michael kitzis and people on the kids blog i've seen

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other things in in journals about price earnings ratios and how those can help

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people um in their retirement income planning so uh you know just a quick uh quick recap

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price earnings typically when you hear that on you know on the on tv or something they're

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talking about current price divided by uh most recent earnings or maybe projected next quarter earnings um but

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what we're going to be looking at is uh i think we could just put under the rubric of cape which is cyclically

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adjusted price to earnings ratio or really just price over a long-term earnings

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pattern so average earnings over a long time window so does this help

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is there a connection to retirement income and if so what is it so

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you'll see this uh this pattern throughout these three examples but with price earnings ratio we see that

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the longer the time window over which we measure those earnings basically the more

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explanatory power which is a a term you know of the art in in statistics it's a

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way to avoid saying uh you know predict predictive power it's you know it's correlation not necessarily causation um

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the higher the explanatory power of price earnings ratio or cape is you know up to a point right so so you can see

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here as we go from zero years so maybe it's one quarter or two quarters um we

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have relatively low r squared relatively low explanatory power although you know honestly 0.29 isn't the end of the world

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um but getting up to close to 0.7 which is quite a robust

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r squared as we get toward 20 years so again this is a pattern we'll see with

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every example here if we use kind of a longer term indicator we get better

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information about retirement income and what i'm doing here is comparing it

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so comparing the the the cape value basically to the

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amount that someone could have withdrawn from a portfolio in this case a 6040 portfolio

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over 30 years so it's really the connection between cape and

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systematic withdrawals now those of you who've been on these webinars before or who use income lab now you know that is

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not the only thing important to retirement income people will have other income sources and so on but we've simplified here to imagine people are

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just funding their retirement from uh from systematic withdrawals

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okay so this relationship as you might expect is inverse so if you have high pe

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high cape that means that you know stocks are relatively expensive at least earnings are

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relatively expensive um and so the more expensive those are

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historically which is the only way that we can measure this kind of thing right we have to look at the actual historical

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patterns um the higher cape is the lower the systematic withdrawal rate that was

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available going forward um so you see that on the left um with the box plot which is you

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know sloping down into the right so when cape is particularly low

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the sustainable withdrawal rates were typically quite high so to remind you what a box plot shows is that center box

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is the middle 50 um and then the whiskers are the edge 25

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um so you can see um it's a relatively wide dispersion but um but the bulk of

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it is definitely quite high um 20-year cape you know looks very similar to 10-year

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cape so that's the one you typically see talked about

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and you can see that since about the late 90s

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cape has been elevated quite a bit compared to history um the one exception was the the 2008

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period there is a lot of talk about this this pattern

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um and i think there are some plausible reasons to think that it's a little bit of a

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data problem because earnings measures have changed um and so it's possible that cape is not quite as elevated

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compared to history as it looks here but just taking it on on face value

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this clearly indicates that you know elevated cape with respect to history would typically mean

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um that uh advisors would be a little bit more conservative

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on their withdrawal advice um for clients right

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um however cape because we're talking about stock earnings uh is

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not as useful if the allocation is not as heavy in stock so

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you see here if stock allocations are down in the 10 20 range the explanatory

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power is much lower than if we get up to higher higher stock allocation levels again this is

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should not be surprising to any of us of course right this is a stock indicator so presumably um it's going to be more

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useful when applied to plans where where stock performance matters for

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retirement income planning we'll see as we go on to some more examples of

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this but in practice what we do at income lab is we actually combine

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indicators together so that we're always presenting kind of a broader picture of economic context rather than

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highlighting a single indicator

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okay our second example is um what we call nest eggs

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um and really this is just a way of measuring

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previous sequence of returns okay but you know it's always more helpful to

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kind of tell a story about things it's more memorable so think about it this way

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this is the amount of money that would be uh available after some

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length of time of systematic savings right so imagine for example you're saving a thousand dollars a month

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adjusted for inflation for 35 years and then you were going to use that as a

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source for withdrawals to fund your lifestyle in retirement um

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that measure would have been very different at different times in history so on the right here you'll see the blue

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uh line shows how much someone would have had if they had if they had engaged in that kind of

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savings behavior systematic savings behavior huge differences in the in the portfolio

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someone would have had at different times in retirement and you can also see this compared to the

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sustainable withdrawal rate this is a 30-year sustainable withdrawal rate all of this is for 60 40 portfolios

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but you can see this incredible kind of butterfly pattern this inverse pattern

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so again a very strong inverse relationship between previous sequence of returns and

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future sequence of returns that's what this is showing

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as with cape the longer window we use to measure the nest egg

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the better so the the more explanatory power this measure has um

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in in helping provide some context around withdrawals so you can see if we're looking at you know zero to

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let's say um you know 15 years of systematic savings that's

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that's not enough previous sequence of returns to really provide a lot of explanatory power but

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once we get up to you know 20 25 30 35 years we're looking at again

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um quite strong explanatory power for withdrawals

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here um unlike cape which appears to be

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you know quite elevated a little less so now um but still compared to history

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quite elevated um for nest eggs we see a little bit more of a

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kind of a middle of the road pattern so you know back in 2000 the nest egg value um for 30 35 years of savings was

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quite high you know more than uh almost i think it was two and a half

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standard deviations past the mean so way out on the on the um

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on the high end um more recently it's still above average actually that

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that may have uh changed in the last month or so these data were from a little while ago but um we're more kind

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of closer to the average so if you take these two things cape and nest egg or

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previous sequence of returns together um it's it's maybe not as nest egg is is

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not painting as dire a picture for retirees as as cape is

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the other nice thing about nest egg or previous sequence of returns is that

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the explanatory power is relatively high no matter the allocation

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and the highest levels are found with kind of balanced portfolio allocations

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so here we're matching um sequence over prior sequence of returns for

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some allocation call it 6040 or 2080 or 80 20 to

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following sequence of returns for the same portfolio so always matching things together this is why although the story about

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saving and spending is nice um that's not actually what we mean with nest egg what we mean is match the same portfolio

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look at sequence of returns before and after in practice someone might invest differently uh in their saving period

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and in their retirement period or differently in different parts of those times but here we're matching them together

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and we can see that again um nest egg is probably a little bit more useful across a wider range of um of

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portfolios used to fund retirement because even if there's a lot of bonds

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we have relatively high explanatory power so again a useful a useful indicator for providing some

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context okay the last of our three examples um

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is around inflation so this is probably the hottest topic right now um and unfortunately

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short-term inflation so just you know this year the the change in cpi over the

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last 12 months does almost nothing to help us

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understand what someone might be able to withdraw from their portfolio over the

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next 30 years so you can see on the left that that explanatory power is very low

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if we're just looking at the last you know zero years one year uh it's you know point zero five it's basically zero

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however if we look at longer um windows of average inflation so what's

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the trend in inflation um we do actually get um you know once

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you get above 8 10 15 even 20 years we get some reasonable connections between that

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longer term pattern of inflation with

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what sorts of withdrawals might be possible going forward and the connection here is is a positive

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correlation so it's not inverse like the other two were basically historically when inflation has been

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very high for longer periods of time people have typically been able to

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withdraw more from their portfolio going forward when inflation has been very low for long periods of time people have

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been able to withdraw less from their portfolio that can be a little counterintuitive right we think of

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high inflation as being a time of a lot of turmoil and it typically is

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however what we're seeing here is um is basically a reversion to the mean pattern or the idea that you know yes

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inflation might have been very high in let's say the 70s but it came down in the 80s and was

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accompanied by really strong you know equity markets and bond markets

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and so really what we see with inflation is and and vice versa extremely low inflation

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may think well that's that's great stability that's um that's probably a good situation

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um and again it is at the time it feels that way but over very long periods what we see is kind of this reversion to the

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mean this alternation so for example in the mid 60s which is

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really the poster child for um for a period where relatively low

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withdrawals were possible it's where the four percent rule comes from that is the period that uh in the last you know

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hundred years um that had the lowest withdrawal rates possible

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um actually in the mid 60s inflation wasn't all that bad it's that

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higher inflation was coming poor with poor returns were coming right so it was about what was coming in the future so

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long-term inflation at that point was trending quite low it was actually not not too unlike what we've experienced

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recently through the teens um where it was you know two and a half i mean we

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saw we saw deflation in the united states a couple times in the last 10 years

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the difference so far is that um the return somebody might have seen from you

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know 1965 through let's say the early 70s um were

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um much worse than what somebody would have seen so far if they had retired let's

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say um you know five years ago um because they had seen robust returns

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since then so time will tell how much these uh these periods the 60s and the and the 2020s uh rhyme

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but that's that's really what we're what we're seeing here um so the example you see on the screen

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uh shows you know these these periods and for example the the late 40s with um

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where inflation was relatively high um going down to the uh the mid 60s

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where inflation was relatively low and you see you know a drop from five percent to four percent um sustainable

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withdrawals that's not as uh as incredible as going to uh the early 80s

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where inflation was incredibly high and uh we know now that withdrawal rates

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were relatively high um keep in mind that uh the nest eggs available at these points would have been quite different

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right so the nasdaq in the early 80s would not have been as high but with a higher withdrawal rate

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the the dollar amounts withdrawn would have been um would have been better than expected

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okay and just like the other two indicators cape which was strongest with high stock allocations uh nest eggs

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which had reasonable uh levels of explanatory power across portfolio types

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uh inflation measures are shown here compared to the allocation and

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we see kind of the reverse of what we saw with cape so here inflation matters more for bond heavy

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allocations that makes sense because inflation is much more connected with

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with bond performance i would also say inflation is very important for people who have

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um income streams that are not tied to inflation so you know let's say

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social security is tied to inflation but many people would have a nominal

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meaning not adjusting for inflation pension from work um and so for a plan

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that relies heavily on such a such a pension we would also see extremely high explanatory power so this is

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you know we're mostly focusing on connections to portfolios and withdrawals from those

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portfolios but some of these indicators in particular inflation can be really important for

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plans that are a little bit more you know diverse in their uh in their sources of income

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okay so what we've seen so far is that the generally a longer-term

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economic indicator will provide more context more information to an

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advisor who's trying to figure out um you know what's what might my client be in for as they're going through the rest

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of their retirement or embarking on retirement for the first time

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we can also see that connecting those longer term indicators to longer term plans provides

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more help in the planning process so if we're dealing with shorter plans

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the explanatory power is lower so you know what we see here is down to a five-year plan um

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that's probably fairly rare but you know if people are a little little further on in life five or ten year plans might be

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around and we see that uh in particular cape and nest egg are much lower um this

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is basically just showing again that um short-term you know using short term

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uh using any context to provide short term kind of tactical um

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approaches is not as robust as kind of the longer term strategic positioning

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okay so the takeaways from these examples and again these are just examples we've looked at lots of other things um but these are these are quite

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strong is that longer term versions of economic measures tend to have more power than

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shorter term measures more explanatory power is found when matching economic factors to the factors

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that most affect the plan that you're working on and longer term plans have the most to

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gain from economic context

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okay so uh now we'll turn to using economic context in in client communication i think this this may be

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the most important part of of the presentation

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so economic context can be used in in a bunch of ways in planning

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you can certainly use it to tilt income advice up or down when income risk is

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estimated to be particularly high or particularly low and we'll talk a little bit about that at the end of the

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presentation but you can also simply use it to enrich client communication to kind

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of help clients understand the connections between economics and retirement income that might be particularly helpful

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when a client has a particular worry maybe it's inflation maybe it's uh you know recession or depression

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so that's where economic context can really help and we found that providing a historical picture of the

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context really can help clients um understand the

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what the retirement plan you're presenting to them um really means and you know how it compares to the other

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sorts of things that that might have happened in the past or could happen in the in the future um so it's a little

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bit more concrete than just using kind of abstract statistical measures um you

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know for example i would certainly not present clients uh you know r-squared numbers uh when

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talking about economic context um so in the income lab

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uh platform you've seen we have a historical analysis graph it looks like this

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different colors here but uh and what this shows is for the given retirement plan so the

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given mix of of uh income sources the portfolio and so on

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what income level would have been available to somebody with that plan if they were

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to have experienced the sequence of returns and inflation sequences from the past so we know these were real

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sequences of returns and inflation that people really experienced so we know that at least that is the range of

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what's possible and so that graph shows you um the range and you'll see here

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this is a plan that depends only on portfolio withdrawals which again that's that's not all that common but it's

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helpful to just kind of simplify things and we see here um

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that there's quite a range right again we saw from the early 80s very high withdrawal rates were possible from the

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mid 60s they were much lower see a similar thing although most of us wouldn't remember this from you know the

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roaring 20s versus the uh uh the period right around the crash of

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of 1929. um so this huge range right um highs and

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lows but helping clients understand okay yes this is the historical picture but

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which of these pictures should we bother looking at right i mean just although inflation is getting much

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higher now and so we're getting more similar to the the 1980s um

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in in general we're still more like the 60s and 70s um

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than those periods um you know keep in mind interest rates were in the teens right

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um and and so we can say look we've looked at you know your your plan

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depends heavily on the performance of your investments right so so we're really looking at you know our our

26:51

stocks highly valued or or not and if we look at history we see that in general

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in time periods like today when stocks were were valued you know more like they are

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today people could have afforded um a lower withdrawal so they spent a little if

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they had spent less from their portfolio um they they would have had a better time of it right had fewer downward

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adjustments that's what this is really showing the red versus the the blue

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um let's take an example of a nominal pension so let's say somebody you know again will completely simplify and say

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the only thing they have is a 60 000 a year nominal pension um

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so here not really taking portfolio withdrawals into account

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um how much of that nominal pension could they have spent um

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saving the rest into a portfolio so there's some uh performance of

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investments involved here um and and again survived 30 years not had to reduce

27:54

their income um very different um picture here although we do see uh that peak again in

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the in the 1920s um that's actually because there was a lot of deflation uh coming

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up um but you can again say okay there's quite a range of what someone

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could have spent from this 60 000 a year nominal pension um

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for all the way from basically spending all 60 000 of it every year and don't worry about it from the 1920s to periods

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where they were spending basically half and saving the rest to accommodate future

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um cost of living adjustments right so you're kind of putting some putting some money away to it to account for those

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and so in a conversation with a client like this we could say well let's look at the periods where the longer term inflation

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trends were more similar to today so again that picks out the the 60s and early 70s here it does not pick out um

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you know the 80s and 90s and we can say okay um i

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we have a choice here we could assume that inflation will be the worst it's ever been and spend half of this or we

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could you know maybe we'll spend a little bit more than that um thinking that well maybe we won't have

29:05

you know 10 15 years of horrible inflation but if we do you know we'll we'll be we'll be ready to adjust right

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this gives you a a way to have that conversation in this example which is admittedly

29:16

pretty extreme you know helping someone understand that they couldn't spend their entire sixty thousand dollar a year pension would

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would be um potentially quite difficult so this could this could help a bit

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and as i said on income lab we actually combine economic indicators to just provide a kind of a

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broader picture because plants tend to be uh complex they tend to have you know lots of moving parts lots of inputs

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and you're able to dive in a little bit more so you can even we had a an advisor tell us that a

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client was particularly worried about kind of great depression type experiences well you can zoom in and say

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okay here's the crash of 1929. here's world war one here's world war ii and we can look at you know the income proposal

30:03

versus what we know someone could have afforded with the same sequence of returns and sequence of

30:10

inflammation that that someone would have experienced during the great depression so this gives kind of concrete um

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uh connections uh in the minds of of these people now most of us didn't live

30:21

through the great depression but we can at least see what it what it might have looked like

30:27

and again here the the blue in in income lab picks out the periods that are closest

30:33

to today in economic terms does that mean that they're exactly the same as today it's just the gray stuff is the

30:39

things farthest away you know we kind of like gray those and kind of background those and foreground the blue

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to pick out periods that are maybe most uh most comparable to today

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okay so that's that's a little bit about um about communication and communicating economic context um i wrote an article

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in the kitsis blog where i kind of some example kind of scripts about these things too

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so you might have a look at that i will close with a little bit on tilting retirement

31:12

income advice using economic context so a little bit more on the analytical side if you don't if you've had enough charts

31:18

uh for today just close your eyes uh and uh and uh this this part uh will fly by

31:25

um so to to show how um kind of the risk picture

31:31

changes or how you can view retirement risk using a lens of economic

31:36

context we use this tool that derek and i developed we have some articles and kitchens as

31:42

well that we call the the spending risk curve and this is just a way to show that

31:49

there's a trade-off in retirement um you can have higher income and higher spending as long as you're willing to accept a

31:55

higher risk that that spending is too high and you'll have to reduce it at some point or

32:00

if you prefer to really minimize the chances that you'll have to lower your income you're going to have to accept lower income and lower spending right

32:07

now it's just a trade-off there's no right answer people will find themselves anywhere

32:12

along this and we demonst we display this as a curve so just saying risk level 0 to 100 which is equivalent

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to um kind of a in a different framing a probability of success of 100 to 0 or

32:27

probability of failure of 0 to 100 and it just shows the trade-off here right so we see if we wanted to if we

32:34

could accept going from a risk of 10 to a risk of 20

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in this case somebody could have gone from 45 600 to 51 900 in in annual uh

32:46

withdrawals um so this this kind of shows shows the trade-off um between risk level

32:52

probability failure and success and income level so with that in mind

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we can use our historical data and say well what does risk look like when you apply a lens in this case of cape

33:08

so in 2022 these these numbers are from march um

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if we took all of a variable of history and did the same thing ranked how much could

33:18

somebody have afforded um to spend from a million dollar portfolio

33:23

at every risk level right we can see way over on the 100 side uh you know there was

33:29

one time in history where someone could have spent uh you know almost 12 percent of that portfolio right

33:34

whereas on the far left side we see um you know a little bit below forty thousand dollars a little bit below four

33:40

percent that's from the early part of the 20th century so that's the blue line is everything in

33:46

history but what if we only look at times where cape was particularly elevated so we exclude all of those

33:52

really low cape periods right let's exclude the early 80s and so on well if we do that the available income

33:59

at every risk level goes down right so from this shows the risk level

34:04

30 we go from 52 2 to 46 9 right at every single risk level

34:10

we're going down so this again shows that if you want to tilt your advice

34:17

in this case for for someone who has a stock heavy plan um it it might be prudent if you take the

34:23

the cape pattern seriously to to kind of dial that that down now this is not always what you would

34:29

see so in 1982 and using only data available from 1982 so no foresight

34:36

here the opposite happens so if we excluded periods

34:41

that are least like 1982 so basically excluding all the high cape periods because cape

34:48

was quite low in 1982. the blue line shows everything from history up to 1982 the red line is

34:56

through that cape lens right so at this point income available at every risk level has

35:02

gone up so at 30 we went from 53 to 65 so someone in 1982 who was taking cape

35:09

seriously which would have been a trick since the concept of cape did not yet exist but the data was available um they would

35:16

have felt comfortable tilting their income advice up at that point and in retrospect of course that that is

35:22

actually true the early 80s could have somebody could have avoided avoid afforded

35:28

a higher withdrawal rate without taking on more risks so that's what that's what this is showing you just this concept of

35:33

tilting um advice up or down but of course for client communication talking about

35:41

proposed income and retirement except in extremely

35:46

limited circumstances the point is that this will simply affect the proposal so

35:52

if you are applying a tilt if you're applying economic context then the proposed income all else being equal

35:57

right now would be a little bit lower in 1982 it would have been a little bit higher so that is

36:03

sort of the so what of this is how it affects people's um people's lives

36:09

and then as time goes on you know if you're tracking a planet income lab and we reached a point where that was more like 1982 the

36:15

reverse would actually be true so if you're applying a tilt you would actually get a little higher income than

36:20

you would if you were not applying that tilt um so i know that was a lot of data a lot

36:26

of charts um but hopefully uh we have some good uh good questions and so on um but first as

36:33

usual we'll turn it over to derek um and i'm curious derek what kinds of uh

36:39

thoughts you have on applying economic context and also just conversations you're having with clients right now

36:45

yeah and i think for me really the the power you know again of having these analytics

36:51

of knowing that i can tilt kind of my advice in that direction is really useful

36:56

it's not something that i get you know really into the weeds of you know what economic context is how we

37:02

how we select it um but one chart i really excuse me i really like the chart on the

37:08

historical analysis tab when i can go there and show somebody you know here's what it would look like

37:14

here's the plan level of spending um and this this graphic right here is a good example of it where i can really point

37:21

out for at least you know almost all uh you know periods in history right we're seeing that the the spending level

37:27

here is lower than what we'd be looking at and i think that's provides a lot of peace of mind it's one

37:33

of those slides that when i go to this somebody realizes okay yeah if they could have gone and lived through

37:39

world wars and you know everything that's happened from there and i do like to pull out some of those historical events or what you can do by you know

37:46

just toggling on the little purple triangle there and highlight what that is i i think that has been really

37:53

effective in terms of uh kind of helping somebody understand the level of conservativeness that's going into to a

38:00

plan and really for me that's been one of the kind of the way i actually use economic context

38:07

for for my clients is to quick kind of go over that chart show the relative conservativeness of the plan uh relative

38:14

to history and then you know i can make a quick note as well about the blue shaded areas and how those better reflect uh the

38:20

economic conditions we're in now and why those periods you know kind of give those a little bit more weight when

38:26

we're thinking about how um how much they can spend but for me that's about the level of

38:31

depth i'm actually getting into uh you know the communication with the clients even though obviously i love

38:38

love all the stats and power and everything else behind it from an analytical perspective but i like to

38:44

keep things pretty simple and i think uh in general that conversation's gone well with clients and even you know talking

38:49

through things like the inflation in the 70s and 80s when people

38:54

where we're at now that's obviously coming up more and more and uh you know letting them understand

39:00

it was the combination of the low returns coming for people in the 60s plus that high inflation

39:05

um and you know that you know they're certainly taking that into account when we're

39:11

finding their overall spending level um i think is is useful so yeah happy to

39:16

jump into questions but i think that's if somebody's looking for the really practical kind of

39:22

where do i see a lot of conversations coming up it's often this chart here um not not diving too deep into the

39:28

technical weeds unless the client really wants to i was just wondering um

39:33

when you have those historical conversations do you ever have somebody say uh yeah but what if it's worse

39:39

in the future than anything we've ever seen in the past or do you not have as pessimistic of a clientele

39:46

i it hasn't come up much um i i sometimes i like to pull up kind of

39:52

the world wars and some of that right away as i'm showing the the chart and something like if i'm presenting

39:57

actually outside of income lab maybe in a powerpoint or something i'll have those on there and i don't know if that

40:03

maybe deters some of that when people think okay these include world wars these include some tough time periods um

40:11

but um i'm sure that question could come up um and i think you know my my answer there would be that you know

40:17

that's that's why we're going to take a dynamic approach and we'll make adjustments when adjustments are called

40:23

for because it certainly could be the case that uh pass could be worse than in history but also pointing back to you

40:29

know let's look at some of the events that are on the timeline here this is not uh all you know

40:35

rosy great periods and we still see the you know often it's not always the case and sometimes there's a few periods that

40:41

were are showing up below the planned income level but oftentimes it's just a few um

40:46

and that's where i'm having more of that conversation about uh adjustment yeah the the inflation in the 70s and

40:53

80s was profound and long-term so yeah i think that's important to remind people like we actually have seen some relatively

41:00

bad inflation in the united states um uh before and yeah as you said it and it

41:05

can depend quite a bit on the actual plan right so um we do sometimes see kind of the the teens the 19 teams are

41:11

sort of the worst period um but typically those are you know those have to be plans that have a decent

41:17

dependence on on withdrawals so the more you might have social security and things like that you might see those come up but um

41:24

that's helpful thank you luckily do we have some questions we do thanks guys um and to our

41:31

attendees please drop your questions into the q a i will start with the first few ones that we have here um first

41:38

question is i just really want user want to kind of review the nest egg slide again they said they didn't really

41:43

understand that slide so i'm going to be wondering if you can touch that it's probably the the

41:51

that concept of nest egg is potentially the least uh maybe least familiar to people so again

41:59

really what this is measuring is is sequence of returns prior to some point in time and its

42:06

relationship to sequence of returns after that point in time so it's really just a it's a way of kind of showing um

42:13

reversion to the mean or sort of the cyclical nature of of investment performance historically

42:20

so the blue line here shows if if someone had

42:26

spent 35 years saving systematically a thousand dollars a month adjusted for inflation

42:32

which i get is is probably not what most people do right but again this is just a way to measure previous sequence every

42:37

returns so for example the first one here is um is 1906 that's the retirement date so

42:44

for the 35 years before that that person had been saving a thousand dollars a month um

42:50

and they had you know quite a bit above 1.6 million in inflation-adjusted dollars right

42:56

whereas somebody who was retiring in the uh you know roughly 1920 um they would

43:01

have had only four hundred thousand dollars um so hugely different sequence of return there and actually what we see

43:08

was sequence of return previous to today or affecting this nest egg

43:13

amount is that um it's the sequence it's the most recent returns that that matter the most for

43:20

our uh our portfolio um because in this case we've been saving systematically so

43:25

starting out we don't have much money right we put our first thousand in and then our next does and so on but at the end

43:30

we have a lot of funds we've put in there and so the same return percentage will

43:36

have a larger dollar effect on this so it's basically sequences of return we all know that in retirement what matters

43:42

most is segments of return soon after retirement the same is true looking backwards so the most recent

43:48

sequence of return matters the most so that's what this is showing and then the red is simply showing okay

43:54

from that point forward right so call it 19 you know 20. um

44:00

what could someone have actually afforded in withdrawals with full

44:05

with full knowledge of the future right so this is this is looking at actual actual history and we know that actually

44:11

that person in the in 1920 could have could have afforded very large percentage withdrawals which um

44:17

uh would have helped uh their uh helped their situation a lot that's because the 1920s had very good returns

44:24

uh until we got to 1929. so that's that's what that's showing

44:29

um i think that was maybe the slide that

44:34

yep and then uh actually we had a kind of a follow-up on that one so i don't know maybe you want to go back to that last slide but um

44:41

kind of the follow-up question is uh from a different attendees you know they're having trouble connecting making the connection with nest egg and

44:48

sequence of return so are you saying high nest egg implies good prior sequence of returns so more likely that

44:54

sequence or returns is bad going forward so lower withdrawal rate exactly and it's perfectly fine to think

45:01

of this just as nasdaq think of it as your dollar amount i i keep connecting it to sequence of returns because that

45:06

is what it's based on but if you just think okay do people have um you know all else being equal if they had state

45:13

invested uh would they have large nest eggs now or would they be low compared to history

45:19

and that they're they're they're high if things have been good recently um and they're low if things have been bad

45:25

recently and what this is showing is that cyclical nature of okay if things are going really well

45:31

people have larger nest eggs but with that comes the

45:36

um with the idea that maybe they shouldn't spend as much of that nastag as a

45:42

percentage as they might have in a different situation so a lot of people have been talking about this recently i know

45:47

morningstar had some uh research that came out recently and they tried to there were headlines

45:53

about this being you know oh the four percent rule is now 3.3 but there was a lot of work in there saying hey by the

45:59

way there's a connection here to they didn't call it nest eggs but essentially how much money you have um

46:07

and that goes a long way to helping people actually still have an okay standard of living even if the

46:12

withdrawal rate is relatively low compared to history the dollar amounts might be still still pretty reasonable

46:20

awesome and then um next question here is more feedback actually um feedback

46:26

here says it would be helpful if we could add an appendix to income lab reports which contain key economic dates

46:32

uh i'm assuming data such as cape projection inflation etc um the user said this could inform the client

46:38

discussion and reduce the black box aspect of the withdrawal recommendation

46:45

yeah that might be possible for sure and i know you know in our reports we have our assumptions uh reports in the

46:51

gloucester as well which kind of helps already kind of give some of that that information in front um so i could maybe

46:57

just use expanding on that already one additional on the kind of the black box element um ever everybody might be

47:04

different uh levels of familiarity with with what we're doing in the software but if you go to

47:10

um i think the justin and i have a kid's article on the retirement distribution hatchet

47:16

um and i think that's a good one for really trying to get perhaps

47:22

more foundational just kind of what's going on in setting those recommendations and how how risk thinking of kind of total

47:29

risk uh guard rails how those differ from withdrawal rate driven guardrails um i

47:34

think part of our intent in writing that was to help put some turn some

47:40

terminology and understanding around this framework and what it's actually doing um so i found that's one that sometimes

47:46

if somebody is feeling you know where does this come from that's another good resource to go to not so much on economic context that's

47:52

different but um i found that useful thanks thanks dear um

47:57

do we have any other questions those are the q a that's coming so far uh for our users still here please drop in more

48:03

questions um derek while we're waiting on those uh you know one question i know we do briefly talk about uh how you explain

48:10

the historical analysis chart um and i know you know working with users one question they ask is you know what are

48:15

the kind of questions clients most often ask when you do show them that range

48:22

uh for me um and uh i apologize i was reading one of the questions there too at the same time but the so you're

48:28

talking about the historical analysis chart that one specifically

48:33

so they're the i really do think it's it's an interest some some clients it's

48:39

a very quick they just kind of gloss over it and it's like oh that was uh you know that's nice to know this is

48:45

relatively conservative from a historical perspective um some of the clients it's you know

48:50

whatever it is about you know they enjoy history they enjoy um like i've had clients that just

48:56

really get lost in this chart almost about can we you know what was this what was that uh what was the

49:01

uh you know especially when you look at like the recessions and some of all the neat things you can turn on in the chart

49:07

that just really get into it from a historical perspective um so i do have a lot of uh questions that come up i think

49:14

around that and why were certain areas low like you know why do we see the the mid 60s

49:20

having a dip there why do we see the teens with the dip so i think as an advisor um

49:27

being prepared to answer some of those questions can definitely be be useful so kind of having an understanding of

49:33

what's going on what's driving that so that you don't just get that kind of question out of blue and not sure

49:39

how to answer that um but again it for me it's just a lot of getting into the tool understanding it looking at the

49:46

history that was there you know seeing what was going on um and sometimes it's okay to walk away

49:51

and say that's something i need to look into because i'm not a economic historian by any means and so sometimes somebody will hit me with a

49:57

question i don't quite know gotcha cool we got some more uh coming in um

50:04

this one i can answer um the question is where can we find a list of these great articles referenced

50:10

you can find them on our website in our resources section um we have all the articles um

50:16

links to all the ones that justin and derek have done specifically on kids so you can access them through our website as well as other articles that we've

50:22

published um on our resource page and then you can also view all the previous webinar recordings as well

50:29

and then next question here is uh sequence of returns is a look back in

50:35

history how does that apply today to deciding how much to withdraw in 2002 and 2003.

50:43

yeah that's a that's a great uh a great question um so in order to study the

50:49

link between economic context and sequence of returns we we have to use history right i mean

50:54

there's no way to uh or it wouldn't be very interesting to randomize economic context uh in a monte carlo um

51:02

context so that's everything that you've seen in the presentation is is doing

51:07

that um that being said uh i i know that there is value and a lot of people are

51:12

using um particularly today they might say hey look um if i use historical

51:17

sequences of return historical sequences of inflation um which uh

51:23

i think that's that's a maybe a more important term than we than we've understood in the past sequence of

51:29

inflation right high then low that kind of thing if you're using historical patterns you're saying okay it could be a broad

51:35

range of things but you might have a very strong opinion that inflation will be higher for a period and it's not it's

51:43

not really even an uncertainty right and so then i've seen people go to our regime-based monte carlo

51:49

analysis method where then you can kind of put your thumb on the scale change your inflation assumptions at least for

51:54

the near term say hey we we know inflation is higher and let's let's look at what that might

52:00

mean for your plan um you know if it lasts for five ten years um and and then

52:06

you can you can uh you can see how that affects the proposed income um so that is a way i know um you know using

52:13

history again i think i started this presentation by saying it can make us feel a little uncomfortable right because we're saying um

52:20

you know maybe this is the only set of things that could happen um that that's a good way to um to kind of apply that

52:26

opinion if if that is your opinion of um and it doesn't have to be that you're predicting that that's exactly what's

52:32

going to happen you might just want to understand how would i adjust my income advice for somebody if i want to

52:38

make sure that they're protected from kind of a medium-term high inflation period

52:44

perfect um and next question is um when you're talking about tilting advice

52:51

for economic context would we start with the income lab proposed income and then further adjust that amount for current

52:57

cape inflation etc or does an income lab already build these factors into the proposed income figures any suggestions

53:05

or clarifications yeah if you're using the historical analysis

53:11

method which uses historical sequence of returns and secrets of inflation then

53:16

you're already applying economic context if you want to adjust that it's actually

53:22

right here this slider so you can turn it off completely right you could say i think this stuff is

53:27

nonsense don't don't do it um and then apply it to the plan

53:33

um the other way to do it would be as i said maybe you have particular um

53:39

you know things you want to do like like adjust for higher inflation so then you would want to go to the uh

53:45

to the capital market assumptions and um and adjust for example your inflation uh

53:53

for typically what people would do is is use the regime based um because then you don't then you're not saying well it's

53:58

going to be like this forever 30 40 years um you'd be saying okay well i have a nearer term view maybe it's 10 years

54:04

maybe it's less and you could adjust you know your inflation and your inflation standard

54:11

deviations so um again an income lab we don't assume inflation is just flat and

54:16

stays the same every month every year of the plan it's actually it's varying it the same way that it

54:21

varies um investment returns

54:26

perfect and then uh two more questions um i know we've got about five minutes here so there's only 12 everyone's time um so

54:34

second last question is following up on the next egg um so in 1920 is the graph

54:39

indicating that they were able to withdraw over 10 percent from the lower 400k beginning next step next time

54:48

and i can let you get to that i think that's right if i i don't have a photographic

54:55

but uh yeah that's that's exactly right so now these are very brief peaks right so

55:02

uh you're you're catching a falling knife there but uh but yeah exactly kind of that 1920 that could have been i'm not

55:08

sure exactly what year it is but the the sustainable withdrawal rate was above 10

55:14

but from a 400 000 portfolio so we've actually done a we had a webinar i think

55:20

it was on something like what's the worst time to retire in history um where we kind of we talk about this

55:26

concept um i don't know that we called it nest egg we might have um but this idea that it's

55:31

the combination of how much money you have and how much you withdraw as a percentage that leads to your standard

55:37

of of living um and and that's exactly what you would see here is that

55:42

the you know blue line times the red line is a much more it's a much smoother line it's not

55:48

completely flat but it's a much smoother line and then a question here is um if a

55:55

client user utilizes a cash bucketing approach how does that factor into

56:01

the income lab analysis so i would depend on what you mean by cash

56:07

bucketing i definitely you know i would make sure you have the cash allocation put in there and then it will

56:15

um it will apply either your capital market assumptions regarding that the performance of cash

56:20

uh or the historical patterns of cash returns and that is a very important input to the uh to the proposed income

56:29

i know derek you've talked before and we don't we don't have a feature for this on income lab but ways of kind of talking about maybe some of the safer

56:36

assets although in inflation periods i hesitate to call cash safe but um and how you talk about that with clients

56:43

yeah so i i mean i personally like to use michael kids this has an article on using bucketing strategies as more of a

56:50

psychological tool than an actual kind of portfolio management tool that's largely

56:56

how i personally use buckets in my practice so i talk about buckets um i talk about having a protection bucket a

57:01

growth bucket i like a two very simplified two kind of bucket framework but um for me it's understanding income

57:08

labs just gonna be looking at the allocation uh that you have set in there so getting that cash setting

57:14

correct as justin mentioned um but you know if you're actually wanting to analyze like spending down

57:21

one of those buckets that's not something that just to be clear that's as far as i'm aware that's

57:26

not something that can be done in the software no that's that's right

57:32

and then uh these last two are more just um kind of suggestions for future topics um and so to close out i will kind of

57:39

walk through those so uh first one is it'd be nice for future webinars to show how to apply different analysis methods

57:44

so that historical versus monte carlo versus regime based um yeah great topic i think we should do

57:51

that in the future um and then last one is oh it looks like um so we

57:57

have a user you know starting to get notices that plans are needing adjustments and some are in positive directions um any chance we could have a

58:04

webinar to review how to understand implemented plan adjustments in the near future

58:09

that's a great idea as well yeah i think we can definitely do that we could uh we'll uh we'll create some fake plans

58:15

that had different types of adjustments and we'll look at them and see why and so on yep that's good perfect

58:20

well hey i love it um justin derek again thank you guys so much we really appreciate the time you

58:26

made to keep bringing uh these amazing webinars for us and our users um

58:32

for anyone else who's um signed up we will again send out the recording uh later for your review as soon as i close

58:39

off the webinar you will get that survey to put in your cfp information um and

58:44

i'm sorry we had one last um uh no ryan you don't have to subscribe to bridget to get that

58:50

integration up i will actually send you an email here with some information to help you get that integration set up um

58:55

outside of that guys thank you so much and um we will see everyone on the next one take care thanks everybody