Don’t Spend LESS, Use This Retirement Spending Strategy!

don't spend less in retirement because you chose an inferior spending strategy if you've ever wondered if there's a special way to pull your funds from your accounts in retirement to get a better result well that is called your withdrawal strategy everybody in my opinion should know what their withdrawal strategy is so how much can you spend how much should you spend both of these questions are answered with a withdrawal strategy why because everybody wants to get the most from their money without the fear of running out it's a delicate balance to walk to know how to do that many people don't want to die rich they want their last check to bounce but those same people don't want to get close enough to find out what that feels like and so we started talking about withdrawal strategies and we asked that question so the attempt to answer that question has given us different withdrawal strategies today I'm going to give you three I'm going to show you which one is the most simple which one is the most likely to match your lifestyle and which one overpromises and under delivers and then I'll tell you which one I like the best but first i'm Nick Davis founder of brindle and Bay wealth management we are a retirement planning firm we also do tax planning for our clients and for retirees and we're here to help you retire with calmness and Clarity if you like information like this be sure to hit that subscribe button if you hit it twice you'll get notified every time something comes out thanks for that okay I'm going to cover three different retirement spending strategies this is not an exhaustive list but these are three popular ones to talk about today number one inflation adjusted spending number two spending smile number three guard rails spending all right let's define each one of these so inflation adjusted spending you start with a percentage that you think is safe so let's say 4% and if you have a million dollar 4% of a million doar would be $40,000 would be your beginning distribution amount and then you add inflation to it so if we say inflation is going to be 3.2% over the next 30 Years then we would take 40,000 the first year the next year we would add 40,000 plus the 3.2% inflation which is 41280 and then year two we would add 3.2% to the $41,000 and we would do that year after year that's an inflation adjust strategy now that beginning withdrawal amount needs to be low enough that in any situation you're likely to be okay have a high probability of being able to make it now I'm not advocating for this particular strategy and one of the reasons for that is is that it's it's kind of Impractical as you're about to see but also that you uh you you can end up with 800% more ending portfolio value than you started with but you're equally likely to end up completely broke meaning there's the same probability of both of those things happening and that's not cool which brings me to another strategy which we call the spending smile strategy so this basically was coined by or made made Popular by David Blanchett where he recognized that 90% of retirees tend to spend money in a smile and as we're younger we spend more but we gradually spend less money as we get older and then at the end of Life healthc Care kicks up and we kind of spend more and it kind of represents somewhat of a smile so you might start with a slightly higher beginning withdrawal amount let's say 4.5% so on a million dollars that'd be $45,000 and then we would add 3.2% to that but we' add one additional step and that is to subtract 1% from living expenses every year as time goes on and then budget back in health care for the end of life which would cause it to pop back up so this strategy may be the one that matches the way people will truly spend a little bit more closely than say that inflation adjusted strategy here's an image again with the spending smile and we can see that we've added to it the complication of various different cash flows from sources like Social Security and you'll notice that dark blue Hatchet shape and that is your portfolio withdrawals and so you'll notice that it adds to the complexity of withdrawing money and you tend to spend more money from your portfol earlier and that it reduces down as things like Social Security um turn on so you've got this spending smile happening but then you also have this uh extra additional spending that happens in the beginning so something needs to be done for that meaning if you strictly adhere to a spending smile strategy you might do something like take the money for those Gap years or those Bridge years and set that aside so that you know you're spending that and that it's kind of separate from your spending smile adjustments or or your inflation adjusted adjustments but something's going to have to happen there so that those years of Greater distributions are kind of strategically uh taken care of all right that leads me to the one that I think overpromises and underd delivers and that would be called Original guard rails this was made Popular by Jonathan gon a great study that was very helpful to the financial planning profession it promised a larger beginning distribution and the belief is is that people most people could begin their retirement with a larger beginning distribution of say 5.5% as long as they were willing to make adjustments should they come into difficult times to avoid running out of money so the way it works is that you uh start with this larger distribution so let's just say $55,000 on a million dollars and you put a upper guard rail on a lower guard rail and if you if your portfolio were to hit that upper guard rail you could spend more and if your portfolio were to reach the lower lower guard rail you would need to uh reduce your spending to preserve it so I love this idea I love the rules I love the Simplicity of it I love the larger distribution amount the challenge is is that it seems that original guard Wells were shortsighted overly simplistic and a little primitive so according to one analysis people who follow the guid and guard rails rules strictly on average can end up spending as low as 3.02% on average during their lifetime so what that means is that starting with 5.5% because of the adjustments they would have likely had to make they would have been better off just using that inflation adjusted Rule and starting at 4% they would have been able to have more lifetime spending the silver lining in the guard rail idea is that they were on to something really great it just needed to be improved upon so I'm going to introduce an entirely different version of guard rails one that is only like the original guard rails in name but but in function it's completely different and one of the main reasons for that is that these guard rails have um moving parts and they update as you get older it also combines it with the spending smile so we have the lifestyle spending of the spending smile combined with a version of guardrails now I wrote about this in my white paper we call it modern guardrails and you can learn more about that if you look in the video description you can download the white paper and read more about that there all right so we call Modern guard rails and what I like about it is it can tell you when it's okay to spend more or if you're on a path where you need to make some modest adjustments to preserve your portfolio and let me show you what it looks like okay so what you're looking at is a version of guardrails showing you some images from my white paper and this family has $1.7 million in their portfolio they can spend $166,000 per month this includes Social Security and this is gross of tax which means taxes still need to come out of here and this is being monitored on a monthly basis so that if this portfolio were to hit that upper guard rail $1.8 million they would then be told that they could spend $800 more per month however in the near term if they were to have a a dras reduction down to $1.4 million advisor is going to call them up and say you know it's recommended that you reduce your spending from 16,000 down to $1,200 per month now the client can decide if this is comfortable for them or not they can decide if they want to adjust this to be more conservative or more aggressive so they can test it they can look and see instead of using a Carlo dial that says probability of success they can use that money Carlo dial to say how much how many times would you've been told you could increase your spending and in this example every two years you would have been told you could have increased your spending and on average that increase would have been about about 6% it would have ranged anywhere from 5 to 9% and uh here every 23 years on average you would have been told that you need to decrease your spinning and on average it would have been 5% so this is a pretty conservative plan to only have to be told every 23 years that you might have to reduce your spending so it says that in general this is how much more spending you would have had so the average amount of spending you would have had is potentially say 6% more spending than even that beginning withdrawal rate this is a key difference in these guard rails is that you can see this picture here it shows the guard rails during this person's lifetime how they would have changed so this dark blue is their real spending that they were told they could spend and then the red and the green is moving guard rails they update every single month you can see that during this period of time they would have hit the guard rails one two three four five times and have been told they could increase their spending they could also compare it to other time periods so for example um they could have said well if I would have retired in 2007 historically we could just see how it have gone for me this baby blue is showing the intended spending and the reason it goes down is because of the spending smile reducing it by 1% per year and then this dark blue is showing when they can spend more or when they need to spend less and so you can see there were several times because we know that even though they would have gone down a lot in 2008 had they not had this software they may have actually stopped their spending but this software basically said next year let's see what happens or next month let's see what happens well we know what happened in 2008 we know what happened in 2009 and 10 and 11 is it got a lot better and so they were able to increase their spending above their planed spending so what we're seeing here is plan spending versus allowable spending and then when there needed to be a reduction so this is in a good time what about a bad time we can look at different periods of time and we can say well let's go ahead and look at the Great Depression so here we see the light blue it's going down we can see there would been multiple times during the Great Depression surprisingly that we could have spent more and then because that happened early on in retirement then later in retirement we can see that there would have during World Wars we would have been told we need to reduce our spending down now we know that history is not going to happen again however looking forward to anything bad that could happen they can decide if they would be comfortable with the amount of adjustments that would be required or even the frequency so they could set their guard rails to be more conservative if they want less of a chance of that happening or they could set their guard rails to be more aggressive if they're okay with that ironically it also matters how many stocks and equities you have because that's the driver of the ability to hit that upper guard rail because of inflation and dividends and growth and all that really matters so when you're doing retirement and you're spending it's just this simple you've got all your money in a portfolio and one little dot of that is how much you're spending the rest of that money is working for your future it's got dividends hopefully it has growth and all that's working to battle inflation where the rub is is when this little dot that you're spending gets too close to that total amount that you have and there's danger of a bad sequence of events that's where a monitored system comes into play because it's monitoring and saying hey this number this is getting too close to this percentage we need to dial it back a little bit to allow things to recover to see which way the world is going to go okay so if you want a strategy that's really simple you can use that inflation adjusted strategy if you want a strategy that's going to match the way that you're going to spend money more likely in Life or you can spend more earlier in life and less as time goes on then that spending smile may fit you and if you want something that's going to help you to know when it's okay to spend more then you're going to want to look into something like modern guardrails or maybe you don't want to spend more but maybe you just want to know when it's okay to give away more so you can enjoy that during your lifetime what is your withdrawal strategy what does it look like let me know in the comments hey there it's Nick again I wrote something that you might be interested in if you want to know what my favorite retirement income strategy is for most people or many people we refer to it as the money Master guard rails if you're contemplating what your income strategy for retirement may look like I invite you to download a copy of my white paper get the insights you need download a copy today the link is in the video description

Channel: Nick Davis, CFP®

Views: 17,381

Keywords: retirementsavings, 401k, retirement investing, how to retire, retirement planning tips, retirement portfolio, retirement planning, how to retire early, how much do i need to retire, things to do in your retirement, Brindle and Bay, Nick Davis, How to Spend Savings in Retirement, How Is Social Security Calculated?, Will Working Longer Increase My Benefit?, Control Your Taxes, Should they CONVERT to ROTH?, Don’t Spend LESS, Use This Retirement Spending Strategy!

Id: G4D-niuPYU4

Length: 13min 59sec (839 seconds)

Published: Sun Mar 10 2024