Hi, I'm Ed Slott and I'm Jeff Levine.
And we're two guys who just love to talk about retirement and taxes.
Look, our mission is simple to educate you, the saver, so that you can make
better decisions because better decisions on the whole lead to better outcomes.
And here's how we're going to do that.
Each week, Jeff and I will debate the pros and the cons of a particular
retirement strategy or topic.
With the goal of helping you keep more of your hard earned money.
At the end of each debate, there's going to be one clear winner.
You, a more informed saver who can hopefully apply the merits of
each side of the debate to your own personal situation to decide
what's best for you and your family.
So here we go.
Welcome to the Great Retirement Debate.
Ed, move a little this way.
Yeah, what?
Okay, sit up a little higher.
Okay, now smile.
Perfect.
That's it.
Sometimes, Ed, it's the little adjustments that make all the difference in the world.
Yes, that's right.
Today, Ed, we're going to talk about adjustments.
More specifically Is this a chiropractor thing?
Different type of adjustment.
We're going to talk about spending in retirement and what sort of adjustments
people can make and or even what sort of processes people can go through to help
them make sure that they don't run out of money before they run out of life.
Right.
I don't know about you, Ed, but for me, even people with significant wealth,
that tends to be the number one question they have when they hit retirement.
Yeah.
Everybody asks, you know, the 4 percent rule and all of that, how much can I take
out and when will I run out of money?
And I always ask them the same question.
When will you die?
You know, you give me the date of death, I can give you the exact calculation.
So you already brought up one with the 4 percent rule.
So really when I think about retirement spending, right?
I just say that because everybody says that.
Yeah.
No, it's a prominent rule for for those You know who are not aware
which I think most people would be aware if they're listening But the 4
percent rule made popular by planner Bill Bengen years ago where he
researched he said what what's the?
The largest percentage that someone could take from their retirement portfolio and
not run out of money over a 30 year span.
Now, of course, he used historical returns, right?
And so there's no guarantee that those same historical returns would,
you know, would still be true today.
But what he found was if you took 4 percent out, of a retirement account or
really just 4 percent of your assets each and every year that you would not run out
of money in any of the, you know, in any of the periods of time that he analyzed.
But again, that doesn't mean that the same would hold true today.
So, so just to put numbers on it, it's not that much.
Uh, you'd have to have a million dollars just to generate 4, of income.
Correct.
Now, of course that You know, it's separate and apart from any
social security someone might have.
No, just on that.
But yeah, exactly.
From your portfolio, that, that's generally what the 4
percent rule would assume, right?
Which doesn't seem like a lot.
It doesn't.
But if you're trying to make dollars last for 30 years, and the other thing
is to inflation adjust those dollars.
In other words, 40, 000 year one, Ed, but in year two, you know, maybe
41, 000, year three, 42, 000, and so forth to make sure that you're.
You're keeping up with inflation.
That's kind of what the research showed.
Now, it's fair to note, though, that 4 percent was the percentage he found where
it would, it was the highest percentage where there were no failures effectively.
But that means to your 90s and so forth.
Well, uh, for a 30 year period, right?
But but what was interesting or what you think about that?
That means that every other scenario except the worst case he analyzed
Someone made it through those 30 years and ended up with money, right?
In fact in many of the cases he analyzed someone would have started let's say
retirement with a million dollars started taking the 40, 000 inflation adjusted
it each year and maybe ended retirement when they died after 30 years with 5
million left, 6 million left, way more than they started with, which may or may
not, you know, comport with their goals.
If their goals, I'd like to leave my kids a big inheritance.
It's pretty good.
If your goal is, I hate my kids and I want to spend every dollar,
you've done a bad job if you die with five billion dollars, right?
I just don't think, we've talked about this before, anybody can bring themselves
to spend their last dollar as a plan.
It definitely is.
Well, that, that gets to the heart of our discussion today, Ed, which is
how do you think about adjusting your spending in retirement to stay on track?
And staying on track is about spending and to, to help achieve your goals.
If your goal, again, is I want to, uh, leave a significant inheritance behind,
then dying with a lot of money inside your accounts, and when I say dying with a lot
of money, I don't mean like unexpected at a heart attack, I mean living a reasonable
life expectancy, going, you know, things going quote unquote according to plan.
Uh, then you, you, you might have to adjust upwards your spending in
order to account for that if your goal is just to enjoy your retirement
to the fullest extent possible.
Now the old school people, I know Mike, my parents generation, the
World War II generation, they always said, never touch principal.
Yeah, that's very good when you have an interest rate.
And we're finally back to a meaningful interest rate today, but for a long time.
People do think like that.
Well, I never want to see that go down.
Yeah, well, uh, Again, if your goal is to leave an inheritance behind.
That's not a bad idea.
No, the goal, forget about beneficiaries.
I think in those cases, their goal is they never want to leave themselves
in case there's something that comes up, big cash, you know, medical,
whatever it is, they never want to go.
They want to have that cushion.
But, that cushion effectively means if you never go below your principle,
you are theoretically going to die with the amount that you started with,
which, again, Well, that is, that is.
But that, if your goal is not to leave behind an inheritance, you've,
you've, you've shortchanged yourself.
No, that, you can have both.
I mean, they're going to get the inheritance, but that wasn't driving it.
The thing that was driving it, as you get older, you worry
about running out of money.
Yes.
And they never want to see that balance go down.
So if we think about like ways in which people structure their retirement
distributions today, I can think of like three or four different ways
that people set up their accounts and think about taking distributions.
Like one of them would just be, uh, you know, a, a fixed dollar amount, right?
So they start and they begin taking Let's say a hundred thousand dollars a
year beginning the year they retire, and they take a hundred thousand dollars,
exactly that amount, every single year.
Effectively, you know, this is the classic annuitization.
Now you can do it with a real annuity, or you can just kind of pseudo
annuitize your own money, if you will, and just take the same dollar amount.
The, uh, the, the nice part, if you will, is if you use an annuity, you
have some protection, right, Ed?
Right.
You have guaranteed payments for life.
I have those myself.
So, there's some benefit there.
The downside to, like, let's say a, a regular annuity that is fixed over
an annual basis where there's no increases is that you can't No, you
won't keep up with inflation over time.
Yeah, but they, they have riders and stuff like that.
And you pay for all of those things.
You do, so if you, you can certainly add inflation adjustments to an annuity, but
I think there's two things worth knowing.
Like, today, well one, if you add those riders, it means you're taking less
income day one than you otherwise would.
Right, that's what I mean, you pay for it somewhere.
Yeah, it's always going to be there.
And the second thing is, there's actually, uh, there used to be
products, I think, Um, but I know today for a fact that we don't have
any true inflation adjusted annuities.
You can get a 2 percent or 3 percent every year, but it won't actually take into
consideration the true cost of living because the insurance carriers are worried
about that type of risk taking it on.
So, but that's one way, right?
Is, is taking a fixed annuity.
over the course of your life.
And that's like the worry free way.
Well, worry free, it might feel good.
But again, if you live a long time, 20, 30 years, 100, 000 in 20 or 30 years is not
going to be worth what 100, 000 is today.
So the benefit there is that you have the guarantee of income.
The downside is Lifetime guarantee.
That's right.
Lifetime guarantee, potentially, right?
But the downside is you're losing some, uh, inflation protection.
Yeah, spending power.
Yep.
You know, another possibility would be to take, let's say, a fixed percentage
each year, a la, as you brought up before, the, the 4 percent rule.
Now, the upside to this is that if you do this kind of on a regular
basis, and you structure your initial percentage at 4%, or some reasonable
percentage that you, you believe is going to last, you should be able to
You know, make it throughout your entire retirement and not run out of money.
And also to have a predictable income stream.
Right, right.
Obviously you, you have to figure in what, what your cost of living
is, your expenses, and look at, look at that growing over time
and with inflation as well.
Now, the one thing that is challenging about that though, is
if you just take a fixed percentage, uh, of your dollars each year.
Then you, uh, you end up a fixed percentage of your
initial dollars, I should say.
You're, you're discounting any changes that occur in your portfolio.
For instance, if it's a really bad market, you retire into a bear market.
Oh, yeah, yeah.
You know, taking the, the, that percentage, that flat
percentage that you started with.
Well, the challenge is you, it becomes a larger Yeah, but much higher percentage.
Right.
If you start taking 4% out of a million dollars.
That's fine.
But now if you go, let's say the market drops and just to make our
math easy, let's say it drops by 50%, the same 40, 000 out of 500, 000.
It's 8%.
That's called sequence of returns risk.
Indeed.
One of the most important things that retirees should be mindful of,
you know, those initial retirement years, the few years just before,
the few years just after retirement, like a red zone of risk for retirees.
The returns in those years.
It's hard to come back from that.
It is.
The returns in those years have outsized importance.
But it can also work to the upside, right, where if those first few years
of retirement are really strong.
Right.
Taking out, again, a fixed percentage of those initial dollars may mean
you're not taking out enough.
Uh, again, it depends upon someone's goals, but that's you and what,
that's where I said before, the goals mean has to cover your spending.
Yes, that's exactly right.
And but someone may say, I, Hey, if the markets do well, I wanna spend more.
Well, if you're taking out this flat percentage, then that doesn't do it.
Now you could say, well, I'll just, instead of taking out 4%, like
40,000 year one and 41,000, year two, 42,000, year three, and so forth.
You could say, well, I'll just take out 5 percent of my portfolio
every year or something like that.
The challenge there though, is you have a lot of variability in your income, right?
For instance, if your account value is a million dollars
in year one, that's $50,000.
If in year two, the account has dropped to 700, 000, now you have 35, 000 to live on.
Yeah, yeah.
Um, one thing we haven't discussed, we, we're talking about this
income as if it's all spendable.
What about taxes?
Yes.
Well, taxes have to come out of that percentage, which is, you
know, further going to erode that.
That's going to cost a living.
Absolutely.
Yeah, and, and can significantly erode that further.
So, you know, the So, you know what I did?
What'd you do?
Well, we talked about, uh, having guaranteed income for life and I always
say this in my consumer seminars when I talk about annuities like you were
talking about, I said the only thing better than, uh, tax free income for life.
I think you were going to say the only thing better than income for life.
Yeah, yeah.
Let me explain to you what you were about to say.
Yeah, yeah, yeah.
Yes.
Here's what I always say.
Except for right now that I did set it backwards.
All right.
The only thing better than guaranteed income for life.
What is it, Ed?
Guaranteed tax free income for life.
You know, when I say that in seminars, people light up witty.
In other words, you just keep all the money.
Uh, I did it myself because I have annuities in my own Roth IRA.
Not only do I have guaranteed income for life, but if I take it from there, it's
guaranteed tax free income for life.
Now, I haven't done the whole thing.
I still have a stock portfolio in there, but it's a good cushion
against a guardrail, a buffer.
Yeah.
And so, you know, that's one way in which you can make sure that
you don't outlive your money.
Another way and a way that was made possible or not possible, uh, popular,
um, by a, uh, an article written a number of years ago, uh, Jonathan
Guyton, the financial planner made this, um, largely, uh, You really
raised this possibility was this thing called gutters and guardrails, right?
The idea that you would put some bands around your your percentage distribution
So that for instance if in year one you started out taking four percent you would
make yourself some Decisions at that point to say hey as long as each year my account
is You know, my distributions are between You three and 5 percent of my portfolio,
I'm not going to change anything.
But if on the chance that the markets do poorly, and my distribution
is too high, then I'll adjust my income each year downwards.
And the opposite too, saying, Hey, if the markets do well, and my
withdrawal rate is too low, you know, that's actually, it sounds like a
bad thing, a too low withdrawal rate, but that's actually a good thing.
It means your account balance is too high and you're not taking out
enough that you could take out more.
And this, uh, this gutters and guardrails approach actually has a, A really, really
profound impact on helping individuals to make course corrections throughout
their retirement and not, um, not to, not only avoid running out of money,
but to avoid drastic changes in their income from one year to the next.
So definitely changes from time to time as markets move and account values change.
But it, it, uh, one of the more effective ways, in my opinion at least.
Uh, Helping individuals to make sure they don't outlive their money.
But also spend enough each year.
It's amazing what a few minor changes early in retirement can do and
how much of an impact on a 30 year retirement spending pattern it can have.
But again, you have to be able to manage your expenses and sometimes
that's out of your control.
Medical bills hit and things like that.
Yeah.
And, and, and those are the, those are the shock expenses
that often derail a retirement.
Um, for sure.
Uh, long term care certainly would be one of them.
Uh, probably, you know, that's probably the single biggest one
that most retirees worry about.
Um, you know, there are certain ways of mitigating that, whether it be long
term care insurance or you know, in some cases, individuals who have not, uh,
who have either not accumulated enough assets or have done certain planning
to make themselves look like they have not accumulated enough assets, uh, can,
you know, enroll in Medicaid, but that is more or less effective depending
upon which state you're living in.
Yeah, that's generally not a good plan, but it is the last plan for some people.
Yeah, it's um, I think people prefer choice.
And when you have Medicaid, you often lose a significant amount of choice
over the type of care you can receive.
Well, on that happy note,
well, listen, the most important thing is that people, when they're
looking at making their retirement decisions, right there, they're
doing so with an eye on the future retirement for a lot of people today
is, you know, is 20, 25, 30 plus years.
And what you start with on day one of retirement very quickly changes.
You know, I'm fond of saying when someone comes into the office, their financial
plan is valuable, it's meaningful, um, and it helps us make good informed decisions.
But at the end of the day, it's, it's already out of date by the time
they have walked out of the office.
Things change.
We need to change to accommodate and so it's important to develop a
spending pattern in retirement that helps keep track Uh that helps you you
need to figure out how you're going to adjust your spending in retirement
To make sure that you're going to not outlive your money Sometimes that means
spending less today to have a little bit more buffer later Sometimes that
allows you to spend a little bit more today because you have the buffer But
you got to know what you're doing.
Yeah.
The problem is the unknown, like you were talking about the markets up.
Uh, so the advice is retire into an arising market.
That's right.
Only retire when there's a good market into the future.
We're going to leave it at that.
Hopefully you're a clairvoyant and you've picked up some stuff here today
from the great retirement debate.
Ed, always a fun time with you.
Jeffrey Levine is Chief Planning Officer for Buckingham Wealth Partners.
This podcast is for informational and educational purposes only and should
not be construed as specific investment, accounting, legal, or tax advice.
Certain information mentioned may be based on third party information
which may become outdated or otherwise superseded without notice.
Third party information is deemed to be reliable but its accuracy and
completeness cannot be guaranteed.
The topic discussed and corresponding arguments are those of the speakers
and may not accurately reflect those of Buckingham Wealth Partners.