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Hi, I'm Ed Slott and I'm Jeff Levine.

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And we're two guys who just love
to talk about retirement and taxes.

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Look, our mission is simple to educate
you, the saver, so that you can make

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better decisions because better decisions
on the whole lead to better outcomes.

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And here's how we're going to do that.

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Each week, Jeff and I will debate
the pros and the cons of a particular

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retirement strategy or topic.

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With the goal of helping you keep
more of your hard earned money.

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At the end of each debate, there's
going to be one clear winner.

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You, a more informed saver who
can hopefully apply the merits of

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each side of the debate to your
own personal situation to decide

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what's best for you and your family.

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So here we go.

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Welcome to the Great Retirement Debate.

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Ed, move a little this way.

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Yeah, what?

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Okay, sit up a little higher.

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Okay, now smile.

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Perfect.

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That's it.

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Sometimes, Ed, it's the little adjustments
that make all the difference in the world.

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Yes, that's right.

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Today, Ed, we're going to
talk about adjustments.

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More specifically Is this
a chiropractor thing?

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Different type of adjustment.

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We're going to talk about spending in
retirement and what sort of adjustments

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people can make and or even what sort of
processes people can go through to help

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them make sure that they don't run out
of money before they run out of life.

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Right.

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I don't know about you, Ed, but for me,
even people with significant wealth,

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that tends to be the number one question
they have when they hit retirement.

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Yeah.

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Everybody asks, you know, the 4 percent
rule and all of that, how much can I take

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out and when will I run out of money?

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And I always ask them the same question.

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When will you die?

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You know, you give me the date of death,
I can give you the exact calculation.

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So you already brought up
one with the 4 percent rule.

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So really when I think about
retirement spending, right?

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I just say that because
everybody says that.

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Yeah.

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Yeah.

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No, it's a prominent rule for for
those You know who are not aware

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which I think most people would be
aware if they're listening But the 4

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percent rule made popular by planner
Bill Bengen years ago where he

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researched he said what what's the?

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The largest percentage that someone could
take from their retirement portfolio and

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not run out of money over a 30 year span.

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Now, of course, he used
historical returns, right?

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And so there's no guarantee that
those same historical returns would,

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you know, would still be true today.

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But what he found was if you took 4
percent out, of a retirement account or

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really just 4 percent of your assets each
and every year that you would not run out

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of money in any of the, you know, in any
of the periods of time that he analyzed.

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But again, that doesn't mean that
the same would hold true today.

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So, so just to put numbers
on it, it's not that much.

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Uh, you'd have to have a million
dollars just to generate 4, of income.

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Correct.

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Now, of course that You know,
it's separate and apart from any

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social security someone might have.

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No, just on that.

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But yeah, exactly.

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From your portfolio, that,
that's generally what the 4

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percent rule would assume, right?

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Which doesn't seem like a lot.

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It doesn't.

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It doesn't.

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But if you're trying to make dollars
last for 30 years, and the other thing

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is to inflation adjust those dollars.

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In other words, 40, 000 year one,
Ed, but in year two, you know, maybe

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41, 000, year three, 42, 000, and
so forth to make sure that you're.

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You're keeping up with inflation.

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That's kind of what the research showed.

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Now, it's fair to note, though, that 4
percent was the percentage he found where

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it would, it was the highest percentage
where there were no failures effectively.

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But that means to your 90s and so forth.

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Well, uh, for a 30 year period, right?

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But but what was interesting
or what you think about that?

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That means that every other scenario
except the worst case he analyzed

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Someone made it through those 30
years and ended up with money, right?

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In fact in many of the cases he analyzed
someone would have started let's say

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retirement with a million dollars started
taking the 40, 000 inflation adjusted

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it each year and maybe ended retirement
when they died after 30 years with 5

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million left, 6 million left, way more
than they started with, which may or may

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not, you know, comport with their goals.

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If their goals, I'd like to
leave my kids a big inheritance.

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It's pretty good.

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If your goal is, I hate my kids
and I want to spend every dollar,

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you've done a bad job if you die
with five billion dollars, right?

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I just don't think, we've talked about
this before, anybody can bring themselves

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to spend their last dollar as a plan.

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It definitely is.

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Well, that, that gets to the heart
of our discussion today, Ed, which is

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how do you think about adjusting your
spending in retirement to stay on track?

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And staying on track is about spending
and to, to help achieve your goals.

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If your goal, again, is I want to, uh,
leave a significant inheritance behind,

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then dying with a lot of money inside your
accounts, and when I say dying with a lot

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of money, I don't mean like unexpected at
a heart attack, I mean living a reasonable

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life expectancy, going, you know, things
going quote unquote according to plan.

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Uh, then you, you, you might have
to adjust upwards your spending in

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order to account for that if your
goal is just to enjoy your retirement

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to the fullest extent possible.

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Now the old school people, I know
Mike, my parents generation, the

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World War II generation, they
always said, never touch principal.

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Yeah, that's very good when
you have an interest rate.

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And we're finally back to a meaningful
interest rate today, but for a long time.

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People do think like that.

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Well, I never want to see that go down.

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Yeah, well, uh, Again, if your goal
is to leave an inheritance behind.

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That's not a bad idea.

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No, the goal, forget about beneficiaries.

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I think in those cases, their goal is
they never want to leave themselves

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in case there's something that comes
up, big cash, you know, medical,

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whatever it is, they never want to go.

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They want to have that cushion.

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But, that cushion effectively means
if you never go below your principle,

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you are theoretically going to die
with the amount that you started with,

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which, again, Well, that is, that is.

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But that, if your goal is not to
leave behind an inheritance, you've,

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you've, you've shortchanged yourself.

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No, that, you can have both.

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I mean, they're going to get the
inheritance, but that wasn't driving it.

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The thing that was driving it,
as you get older, you worry

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about running out of money.

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Yes.

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And they never want to
see that balance go down.

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So if we think about like ways in
which people structure their retirement

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distributions today, I can think of
like three or four different ways

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that people set up their accounts
and think about taking distributions.

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Like one of them would just be, uh, you
know, a, a fixed dollar amount, right?

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So they start and they begin taking
Let's say a hundred thousand dollars a

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year beginning the year they retire, and
they take a hundred thousand dollars,

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exactly that amount, every single year.

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Effectively, you know, this
is the classic annuitization.

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Now you can do it with a real annuity,
or you can just kind of pseudo

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annuitize your own money, if you will,
and just take the same dollar amount.

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The, uh, the, the nice part, if you
will, is if you use an annuity, you

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have some protection, right, Ed?

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Right.

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You have guaranteed payments for life.

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I have those myself.

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So, there's some benefit there.

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The downside to, like, let's say a,
a regular annuity that is fixed over

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an annual basis where there's no
increases is that you can't No, you

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won't keep up with inflation over time.

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Yeah, but they, they have
riders and stuff like that.

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And you pay for all of those things.

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You do, so if you, you can certainly add
inflation adjustments to an annuity, but

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I think there's two things worth knowing.

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Like, today, well one, if you add those
riders, it means you're taking less

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income day one than you otherwise would.

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Right, that's what I mean,
you pay for it somewhere.

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Yeah, it's always going to be there.

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And the second thing is, there's
actually, uh, there used to be

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products, I think, Um, but I know
today for a fact that we don't have

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any true inflation adjusted annuities.

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You can get a 2 percent or 3 percent every
year, but it won't actually take into

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consideration the true cost of living
because the insurance carriers are worried

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about that type of risk taking it on.

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So, but that's one way, right?

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Is, is taking a fixed annuity.

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over the course of your life.

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And that's like the worry free way.

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Well, worry free, it might feel good.

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But again, if you live a long time, 20, 30
years, 100, 000 in 20 or 30 years is not

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going to be worth what 100, 000 is today.

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So the benefit there is that you
have the guarantee of income.

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The downside is Lifetime guarantee.

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That's right.

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Lifetime guarantee, potentially, right?

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But the downside is you're losing
some, uh, inflation protection.

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Yeah, spending power.

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Yep.

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You know, another possibility would be
to take, let's say, a fixed percentage

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each year, a la, as you brought up
before, the, the 4 percent rule.

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Now, the upside to this is that if
you do this kind of on a regular

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basis, and you structure your initial
percentage at 4%, or some reasonable

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percentage that you, you believe is
going to last, you should be able to

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You know, make it throughout your entire
retirement and not run out of money.

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And also to have a
predictable income stream.

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Right, right.

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Obviously you, you have to figure
in what, what your cost of living

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is, your expenses, and look at,
look at that growing over time

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and with inflation as well.

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Now, the one thing that is
challenging about that though, is

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if you just take a fixed percentage,
uh, of your dollars each year.

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Then you, uh, you end up
a fixed percentage of your

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initial dollars, I should say.

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You're, you're discounting any
changes that occur in your portfolio.

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For instance, if it's a really bad
market, you retire into a bear market.

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Oh, yeah, yeah.

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You know, taking the, the,
that percentage, that flat

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percentage that you started with.

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Well, the challenge is you, it becomes a
larger Yeah, but much higher percentage.

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Right.

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If you start taking 4%
out of a million dollars.

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That's fine.

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But now if you go, let's say the
market drops and just to make our

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math easy, let's say it drops by 50%,
the same 40, 000 out of 500, 000.

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It's 8%.

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That's called sequence of returns risk.

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Indeed.

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One of the most important things
that retirees should be mindful of,

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you know, those initial retirement
years, the few years just before,

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the few years just after retirement,
like a red zone of risk for retirees.

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The returns in those years.

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It's hard to come back from that.

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It is.

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The returns in those years
have outsized importance.

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But it can also work to the upside,
right, where if those first few years

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of retirement are really strong.

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Right.

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Taking out, again, a fixed percentage
of those initial dollars may mean

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you're not taking out enough.

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Uh, again, it depends upon someone's
goals, but that's you and what,

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that's where I said before, the goals
mean has to cover your spending.

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Yes, that's exactly right.

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And but someone may say, I, Hey, if the
markets do well, I wanna spend more.

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Well, if you're taking out this flat
percentage, then that doesn't do it.

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Now you could say, well, I'll just,
instead of taking out 4%, like

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40,000 year one and 41,000, year two,
42,000, year three, and so forth.

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You could say, well, I'll just
take out 5 percent of my portfolio

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every year or something like that.

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The challenge there though, is you have a
lot of variability in your income, right?

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For instance, if your account
value is a million dollars

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in year one, that's $50,000.

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If in year two, the account has dropped to
700, 000, now you have 35, 000 to live on.

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Yeah, yeah.

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Um, one thing we haven't discussed,
we, we're talking about this

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income as if it's all spendable.

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What about taxes?

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Yes.

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Well, taxes have to come out of
that percentage, which is, you

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know, further going to erode that.

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That's going to cost a living.

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Absolutely.

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Yeah, and, and can significantly
erode that further.

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So, you know, the So, you know what I did?

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What'd you do?

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Well, we talked about, uh, having
guaranteed income for life and I always

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say this in my consumer seminars when
I talk about annuities like you were

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talking about, I said the only thing
better than, uh, tax free income for life.

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I think you were going to say the only
thing better than income for life.

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Yeah, yeah.

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Let me explain to you what
you were about to say.

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Yeah, yeah, yeah.

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Yes.

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Here's what I always say.

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Except for right now that
I did set it backwards.

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All right.

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The only thing better than
guaranteed income for life.

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What is it, Ed?

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Guaranteed tax free income for life.

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You know, when I say that in
seminars, people light up witty.

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In other words, you
just keep all the money.

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Uh, I did it myself because I
have annuities in my own Roth IRA.

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Not only do I have guaranteed income for
life, but if I take it from there, it's

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guaranteed tax free income for life.

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Now, I haven't done the whole thing.

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I still have a stock portfolio
in there, but it's a good cushion

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against a guardrail, a buffer.

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Yeah.

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And so, you know, that's one way
in which you can make sure that

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you don't outlive your money.

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Another way and a way that was made
possible or not possible, uh, popular,

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um, by a, uh, an article written a
number of years ago, uh, Jonathan

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Guyton, the financial planner made
this, um, largely, uh, You really

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raised this possibility was this thing
called gutters and guardrails, right?

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The idea that you would put some bands
around your your percentage distribution

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So that for instance if in year one you
started out taking four percent you would

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make yourself some Decisions at that point
to say hey as long as each year my account

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is You know, my distributions are between
You three and 5 percent of my portfolio,

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I'm not going to change anything.

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But if on the chance that the markets
do poorly, and my distribution

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is too high, then I'll adjust
my income each year downwards.

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And the opposite too, saying, Hey,
if the markets do well, and my

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withdrawal rate is too low, you know,
that's actually, it sounds like a

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bad thing, a too low withdrawal rate,
but that's actually a good thing.

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It means your account balance is
too high and you're not taking out

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enough that you could take out more.

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And this, uh, this gutters and guardrails
approach actually has a, A really, really

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profound impact on helping individuals
to make course corrections throughout

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their retirement and not, um, not to,
not only avoid running out of money,

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but to avoid drastic changes in their
income from one year to the next.

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So definitely changes from time to time
as markets move and account values change.

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But it, it, uh, one of the more
effective ways, in my opinion at least.

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Uh, Helping individuals to make
sure they don't outlive their money.

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But also spend enough each year.

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It's amazing what a few minor changes
early in retirement can do and

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how much of an impact on a 30 year
retirement spending pattern it can have.

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But again, you have to be able to
manage your expenses and sometimes

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that's out of your control.

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Medical bills hit and things like that.

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Yeah.

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And, and, and those are the,
those are the shock expenses

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that often derail a retirement.

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00:14:19,580 --> 00:14:20,260
Um, for sure.

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Uh, long term care certainly
would be one of them.

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Uh, probably, you know, that's
probably the single biggest one

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that most retirees worry about.

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Um, you know, there are certain ways
of mitigating that, whether it be long

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term care insurance or you know, in some
cases, individuals who have not, uh,

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who have either not accumulated enough
assets or have done certain planning

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to make themselves look like they have
not accumulated enough assets, uh, can,

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you know, enroll in Medicaid, but that
is more or less effective depending

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upon which state you're living in.

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Yeah, that's generally not a good plan,
but it is the last plan for some people.

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Yeah, it's um, I think
people prefer choice.

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And when you have Medicaid, you often
lose a significant amount of choice

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over the type of care you can receive.

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Well, on that happy note,

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well, listen, the most important
thing is that people, when they're

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looking at making their retirement
decisions, right there, they're

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doing so with an eye on the future
retirement for a lot of people today

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is, you know, is 20, 25, 30 plus years.

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And what you start with on day one
of retirement very quickly changes.

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You know, I'm fond of saying when someone
comes into the office, their financial

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plan is valuable, it's meaningful, um, and
it helps us make good informed decisions.

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But at the end of the day, it's,
it's already out of date by the time

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they have walked out of the office.

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Things change.

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We need to change to accommodate
and so it's important to develop a

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spending pattern in retirement that
helps keep track Uh that helps you you

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00:15:48,935 --> 00:15:52,314
need to figure out how you're going
to adjust your spending in retirement

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00:15:52,605 --> 00:15:56,074
To make sure that you're going to not
outlive your money Sometimes that means

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spending less today to have a little
bit more buffer later Sometimes that

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allows you to spend a little bit more
today because you have the buffer But

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you got to know what you're doing.

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Yeah.

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The problem is the unknown, like you
were talking about the markets up.

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Uh, so the advice is retire
into an arising market.

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That's right.

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00:16:11,539 --> 00:16:14,090
Only retire when there's a
good market into the future.

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We're going to leave it at that.

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Hopefully you're a clairvoyant and
you've picked up some stuff here today

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from the great retirement debate.

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00:16:19,380 --> 00:16:20,640
Ed, always a fun time with you.

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00:16:22,750 --> 00:16:25,960
Jeffrey Levine is Chief Planning
Officer for Buckingham Wealth Partners.

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00:16:26,100 --> 00:16:29,280
This podcast is for informational and
educational purposes only and should

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00:16:29,280 --> 00:16:32,420
not be construed as specific investment,
accounting, legal, or tax advice.

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00:16:32,640 --> 00:16:35,500
Certain information mentioned may
be based on third party information

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00:16:35,500 --> 00:16:38,290
which may become outdated or
otherwise superseded without notice.

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00:16:38,419 --> 00:16:41,629
Third party information is deemed
to be reliable but its accuracy and

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00:16:41,630 --> 00:16:43,040
completeness cannot be guaranteed.

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00:16:43,220 --> 00:16:46,210
The topic discussed and corresponding
arguments are those of the speakers

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00:16:46,380 --> 00:16:48,940
and may not accurately reflect
those of Buckingham Wealth Partners.