“Before addressing the legitimate assumptions tied to retirement planning, the advisor should first help create and tell a story for the retiree to show the bigger picture. An approach to drawing down retirement income should be laid out in order to see how true that story feels to the owner. If the story fits, the retirement plan has a better chance of blending with that retiree’s style.”In this post, we will push back on Mr. Parrish’s premise that retirees need to be told stories about draw-down strategies as a first step in developing a plan for retirement, and we will propose following our Recommended Retirement Planning Process as a better alternative.
Draw Down Stories
Mr. Parrish’s stories for the three example women featured in the article consist of commonly available drawdown strategies, including:
- A flooring strategy for Abigail
- The systematic withdrawal strategy for Beth, and
- The Bucket Approach for Camila
We also find the tone of Mr. Parrish’s article to be condescending toward the three women (and the reader). To advance the use of his “stories”, Mr. Parrish says,
“A challenge is that when these women seek professional help, the solutions offered by retirement advisors might quickly devolve into spreadsheets and simulators, assumptions and alternatives. The complex process of retirement income planning can potentially leave all three pre-retirees more confused than comforted.”and
“What seemed like an informative strategy session became a frustrating slog into financial uncertainty. These women shouldn’t feel like they are being punished for successfully saving wealth.”Really? The three single women discussed in Mr. Parrish’s article have managed to accumulate sizeable 401(k) account balances and are all eligible for an immediate annual Social Security benefit at age 65 of about $30,000. This amount is very close to the maximum Social Security benefit currently available to an individual commencing benefits at age 65. To us, this is a clear indication (as near career maximum Social Security wage earners) that these three women are probably not easily confused by a few numbers and somehow require special comforting to make sure their plan is consistent with their “style.”
Recommended Financial Planning Process
In our last post, we once again discussed our Recommended Financial Planning Process and provided an example of its implementation. The first three steps in that process are to estimate future annual non-recurring and recurring expenses and categorize those expenses as either essential or discretionary. The next steps quantify wants vs. needs, establish a spending budget and enable an individual (or couple) to make the important decision of how much of their retirement assets should be invested in non-risky investments (Floor Portfolio) vs. risky investments (Upside Portfolio).
In his article, Mr. Parrish asks,
“Should they come up with a number that reflects what they need to draw down in order to meet their standard of living goals, or is the question really how much they can afford as a drawdown?”We believe it is important that all three of the women do both; They should determine how much they can afford to spend as well as how much of their assets will be required to fund their prioritized spending needs (essential expenses). We also believe that it is important for all three women to consider more conservative investment strategies for funding their future essential spending needs than their discretionary spending wants. We agree that the three women in Mr. Parrish’s example may have different goals, risk tolerances and spending needs, but the first step in the process should be to determine how much their essential spending needs will cost them, not which “drawdown strategy” feels best to them.
In addition to enabling you to own your own retirement, our process can also be used to help you make better decisions in retirement. For example, it can help you answer the additional “complex” questions posed in Mr. Parrish’s article, such as when to commence Social Security benefits, what happens if there is significant inflation, etc. Our process is also self-adjusting from year to year.
Summary
Not all expenses in retirement will be recurring expenses. And not all expenses in retirement will have the same priority. Some expenses can be more easily reduced than others if necessary. When measuring risk tolerance, we believe the important question to answer is not how comfortable you may be with risk or how disciplined you are with money, but rather how willing you are to risk your current standard of living for the opportunity to have a higher standard of living in the future. We agree that different individuals may develop different retirement plans, but those plans should differ based on:
- available assets,
- spending goals,
- assumptions about the future, and
- estimates of the cost of one’s standard of living in retirement
If you
- are retired or considering retirement,
- are not afraid of crunching a few numbers, and
- want to own your own retirement,
