December 26, 2024 • 16 mins
In this episode of The Great Retirement Debate, Ed Slott and Jeff Levine address spending in retirement, and whether or not you should be adjusting that spending to keep on track with your retirement goals.
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(00:00):
Hi, I'm Ed Slott and I'm Jeff Levine.
And we're two guys who just loveto talk about retirement and taxes.
Look, our mission is simple to educateyou, the saver, so that you can make
better decisions because better decisionson the whole lead to better outcomes.
And here's how we're going to do that.
Each week, Jeff and I will debatethe pros and the cons of a particular
retirement strategy or topic.
(00:22):
With the goal of helping you keepmore of your hard earned money.
At the end of each debate, there'sgoing to be one clear winner.
You, a more informed saver whocan hopefully apply the merits of
each side of the debate to yourown personal situation to decide
what's best for you and your family.
So here we go.
Welcome to the Great Retirement Debate.
(00:44):
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 adjustmentsthat make all the difference in the world.
Yes, that's right.
Today, Ed, we're going totalk about adjustments.
More specifically Is thisa chiropractor thing?
(01:05):
Different type of adjustment.
We're going to talk about spending inretirement and what sort of adjustments
people can make and or even what sort ofprocesses people can go through to help
them make sure that they don't run outof 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 questionthey have when they hit retirement.
(01:25):
Yeah.
Everybody asks, you know, the 4 percentrule 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 upone with the 4 percent rule.
So really when I think aboutretirement spending, right?
I just say that becauseeverybody says that.
(01:46):
Yeah.
Yeah.
No, it's a prominent rule for forthose You know who are not aware
which I think most people would beaware if they're listening But the 4
percent rule made popular by plannerBill Bengen years ago where he
researched he said what what's the?
The largest percentage that someone couldtake from their retirement portfolio and
(02:06):
not run out of money over a 30 year span.
Now, of course, he usedhistorical returns, right?
And so there's no guarantee thatthose same historical returns would,
you know, would still be true today.
But what he found was if you took 4percent out, of a retirement account or
really just 4 percent of your assets eachand every year that you would not run out
of money in any of the, you know, in anyof the periods of time that he analyzed.
(02:30):
But again, that doesn't mean thatthe same would hold true today.
So, so just to put numberson it, it's not that much.
Uh, you'd have to have a milliondollars 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.
(02:50):
It doesn't.
It doesn't.
But if you're trying to make dollarslast 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, andso 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 4percent was the percentage he found where
(03:17):
it would, it was the highest percentagewhere 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 interestingor what you think about that?
That means that every other scenarioexcept the worst case he analyzed
Someone made it through those 30years and ended up with money, right?
In fact in many of the cases he analyzedsomeone would have started let's say
(03:40):
retirement with a million dollars startedtaking the 40, 000 inflation adjusted
it each year and maybe ended retirementwhen they died after 30 years with 5
million left, 6 million left, way morethan they started with, which may or may
not, you know, comport with their goals.
If their goals, I'd like toleave my kids a big inheritance.
It's pretty good.
If your goal is, I hate my kidsand I want to spend every dollar,
(04:02):
you've done a bad job if you diewith five billion dollars, right?
I just don't think, we've talked aboutthis before, anybody can bring themselves
to spend their last dollar as a plan.
It definitely is.
Well, that, that gets to the heartof our discussion today, Ed, which is
how do you think about adjusting yourspending in retirement to stay on track?
And staying on track is about spendingand to, to help achieve your goals.
(04:26):
If your goal, again, is I want to, uh,leave a significant inheritance behind,
then dying with a lot of money inside youraccounts, and when I say dying with a lot
of money, I don't mean like unexpected ata heart attack, I mean living a reasonable
life expectancy, going, you know, thingsgoing quote unquote according to plan.
Uh, then you, you, you might haveto adjust upwards your spending in
(04:47):
order to account for that if yourgoal is just to enjoy your retirement
to the fullest extent possible.
Now the old school people, I knowMike, my parents generation, the
World War II generation, theyalways said, never touch principal.
Yeah, that's very good whenyou have an interest rate.
And we're finally back to a meaningfulinterest rate today, but for a long time.
People do think like that.
(05:09):
Well, I never want to see that go down.
Yeah, well, uh, Again, if your goalis to leave an inheritance behind.
That's not a bad idea.
No, the goal, forget about beneficiaries.
I think in those cases, their goal isthey never want to leave themselves
in case there's something that comesup, big cash, you know, medical,
whatever it is, they never want to go.
(05:30):
They want to have that cushion.
But, that cushion effectively meansif you never go below your principle,
you are theoretically going to diewith the amount that you started with,
which, again, Well, that is, that is.
But that, if your goal is not toleave behind an inheritance, you've,
you've, you've shortchanged yourself.
No, that, you can have both.
I mean, they're going to get theinheritance, but that wasn't driving it.
(05:51):
The thing that was driving it,as you get older, you worry
about running out of money.
Yes.
And they never want tosee that balance go down.
So if we think about like ways inwhich people structure their retirement
distributions today, I can think oflike three or four different ways
that people set up their accountsand think about taking distributions.
Like one of them would just be, uh, youknow, a, a fixed dollar amount, right?
(06:14):
So they start and they begin takingLet's say a hundred thousand dollars a
year beginning the year they retire, andthey take a hundred thousand dollars,
exactly that amount, every single year.
Effectively, you know, thisis 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.
(06:34):
The, uh, the, the nice part, if youwill, 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 noincreases is that you can't No, you
(06:57):
won't keep up with inflation over time.
Yeah, but they, they haveriders and stuff like that.
And you pay for all of those things.
You do, so if you, you can certainly addinflation adjustments to an annuity, but
I think there's two things worth knowing.
Like, today, well one, if you add thoseriders, 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'sactually, uh, there used to be
(07:20):
products, I think, Um, but I knowtoday for a fact that we don't have
any true inflation adjusted annuities.
You can get a 2 percent or 3 percent everyyear, but it won't actually take into
consideration the true cost of livingbecause 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.
(07:41):
And that's like the worry free way.
Well, worry free, it might feel good.
But again, if you live a long time, 20, 30years, 100, 000 in 20 or 30 years is not
going to be worth what 100, 000 is today.
So the benefit there is that youhave the guarantee of income.
The downside is Lifetime guarantee.
That's right.
Lifetime guarantee, potentially, right?
(08:02):
But the downside is you're losingsome, uh, inflation protection.
Yeah, spending power.
Yep.
You know, another possibility would beto take, let's say, a fixed percentage
each year, a la, as you brought upbefore, the, the 4 percent rule.
Now, the upside to this is that ifyou do this kind of on a regular
basis, and you structure your initialpercentage at 4%, or some reasonable
(08:26):
percentage that you, you believe isgoing to last, you should be able to
You know, make it throughout your entireretirement and not run out of money.
And also to have apredictable income stream.
Right, right.
Obviously you, you have to figurein what, what your cost of living
is, your expenses, and look at,look at that growing over time
(08:46):
and with inflation as well.
Now, the one thing that ischallenging about that though, is
if you just take a fixed percentage,uh, of your dollars each year.
Then you, uh, you end upa fixed percentage of your
initial dollars, I should say.
You're, you're discounting anychanges that occur in your portfolio.
For instance, if it's a really badmarket, you retire into a bear market.
(09:06):
Oh, yeah, yeah.
You know, taking the, the,that percentage, that flat
percentage that you started with.
Well, the challenge is you, it becomes alarger 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 themarket drops and just to make our
math easy, let's say it drops by 50%,the same 40, 000 out of 500, 000.
(09:27):
It's 8%.
That's called sequence of returns risk.
Indeed.
One of the most important thingsthat retirees should be mindful of,
you know, those initial retirementyears, 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 yearshave outsized importance.
(09:49):
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 percentageof those initial dollars may mean
you're not taking out enough.
Uh, again, it depends upon someone'sgoals, but that's you and what,
that's where I said before, the goalsmean has to cover your spending.
Yes, that's exactly right.
And but someone may say, I, Hey, if themarkets do well, I wanna spend more.
(10:12):
Well, if you're taking out this flatpercentage, 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 justtake out 5 percent of my portfolio
every year or something like that.
The challenge there though, is you have alot of variability in your income, right?
(10:35):
For instance, if your accountvalue is a million dollars
in year one, that's $50,000.
If in year two, the account has dropped to700, 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 ofthat percentage, which is, you
(10:56):
know, further going to erode that.
That's going to cost a living.
Absolutely.
Yeah, and, and can significantlyerode that further.
So, you know, the So, you know what I did?
What'd you do?
Well, we talked about, uh, havingguaranteed income for life and I always
say this in my consumer seminars whenI talk about annuities like you were
talking about, I said the only thingbetter than, uh, tax free income for life.
(11:18):
I think you were going to say the onlything better than income for life.
Yeah, yeah.
Let me explain to you whatyou were about to say.
Yeah, yeah, yeah.
Yes.
Here's what I always say.
Except for right now thatI did set it backwards.
All right.
The only thing better thanguaranteed income for life.
What is it, Ed?
Guaranteed tax free income for life.
You know, when I say that inseminars, people light up witty.
(11:40):
In other words, youjust keep all the money.
Uh, I did it myself because Ihave annuities in my own Roth IRA.
Not only do I have guaranteed income forlife, 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 portfolioin there, but it's a good cushion
(12:01):
against a guardrail, a buffer.
Yeah.
And so, you know, that's one wayin which you can make sure that
you don't outlive your money.
Another way and a way that was madepossible or not possible, uh, popular,
um, by a, uh, an article written anumber of years ago, uh, Jonathan
Guyton, the financial planner madethis, um, largely, uh, You really
(12:24):
raised this possibility was this thingcalled gutters and guardrails, right?
The idea that you would put some bandsaround your your percentage distribution
So that for instance if in year one youstarted out taking four percent you would
make yourself some Decisions at that pointto say hey as long as each year my account
(12:45):
is You know, my distributions are betweenYou three and 5 percent of my portfolio,
I'm not going to change anything.
But if on the chance that the marketsdo poorly, and my distribution
is too high, then I'll adjustmy income each year downwards.
(13:05):
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 istoo high and you're not taking out
enough that you could take out more.
And this, uh, this gutters and guardrailsapproach actually has a, A really, really
(13:26):
profound impact on helping individualsto make course corrections throughout
their retirement and not, um, not to,not only avoid running out of money,
but to avoid drastic changes in theirincome from one year to the next.
So definitely changes from time to timeas markets move and account values change.
But it, it, uh, one of the moreeffective ways, in my opinion at least.
(13:51):
Uh, Helping individuals to makesure they don't outlive their money.
But also spend enough each year.
It's amazing what a few minor changesearly in retirement can do and
how much of an impact on a 30 yearretirement spending pattern it can have.
But again, you have to be able tomanage your expenses and sometimes
that's out of your control.
(14:11):
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 certainlywould be one of them.
Uh, probably, you know, that'sprobably the single biggest one
that most retirees worry about.
Um, you know, there are certain waysof mitigating that, whether it be long
term care insurance or you know, in somecases, individuals who have not, uh,
(14:35):
who have either not accumulated enoughassets or have done certain planning
to make themselves look like they havenot accumulated enough assets, uh, can,
you know, enroll in Medicaid, but thatis 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 thinkpeople prefer choice.
(14:59):
And when you have Medicaid, you oftenlose a significant amount of choice
over the type of care you can receive.
Well, on that happy note,
well, listen, the most importantthing is that people, when they're
looking at making their retirementdecisions, right there, they're
doing so with an eye on the futureretirement for a lot of people today
is, you know, is 20, 25, 30 plus years.
(15:22):
And what you start with on day oneof retirement very quickly changes.
You know, I'm fond of saying when someonecomes into the office, their financial
plan is valuable, it's meaningful, um, andit 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 accommodateand so it's important to develop a
(15:43):
spending pattern in retirement thathelps keep track Uh that helps you you
need to figure out how you're goingto adjust your spending in retirement
To make sure that you're going to notoutlive your money Sometimes that means
spending less today to have a littlebit more buffer later Sometimes that
allows you to spend a little bit moretoday because you have the buffer But
you got to know what you're doing.
Yeah.
The problem is the unknown, like youwere talking about the markets up.
(16:07):
Uh, so the advice is retireinto an arising market.
That's right.
Only retire when there's agood market into the future.
We're going to leave it at that.
Hopefully you're a clairvoyant andyou've picked up some stuff here today
from the great retirement debate.
Ed, always a fun time with you.
Jeffrey Levine is Chief PlanningOfficer for Buckingham Wealth Partners.
This podcast is for informational andeducational purposes only and should
(16:29):
not be construed as specific investment,accounting, legal, or tax advice.
Certain information mentioned maybe based on third party information
which may become outdated orotherwise superseded without notice.
Third party information is deemedto be reliable but its accuracy and
completeness cannot be guaranteed.
The topic discussed and correspondingarguments are those of the speakers
and may not accurately reflectthose of Buckingham Wealth Partners.
Hi, I'm Ed Slott and I'm Jeff Levine.
And we're two guys who just loveto talk about retirement and taxes.
Look, our mission is simple to educateyou, the saver, so that you can make
better decisions because better decisionson the whole lead to better outcomes.
And here's how we're going to do that.
Each week, Jeff and I will debatethe pros and the cons of a particular
retirement strategy or topic.
(00:22):
With the goal of helping you keepmore of your hard earned money.
At the end of each debate, there'sgoing to be one clear winner.
You, a more informed saver whocan hopefully apply the merits of
each side of the debate to yourown personal situation to decide
what's best for you and your family.
So here we go.
Welcome to the Great Retirement Debate.
(00:44):
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 adjustmentsthat make all the difference in the world.
Yes, that's right.
Today, Ed, we're going totalk about adjustments.
More specifically Is thisa chiropractor thing?
(01:05):
Different type of adjustment.
We're going to talk about spending inretirement and what sort of adjustments
people can make and or even what sort ofprocesses people can go through to help
them make sure that they don't run outof 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 questionthey have when they hit retirement.
(01:25):
Yeah.
Everybody asks, you know, the 4 percentrule 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 upone with the 4 percent rule.
So really when I think aboutretirement spending, right?
I just say that becauseeverybody says that.
(01:46):
Yeah.
Yeah.
No, it's a prominent rule for forthose You know who are not aware
which I think most people would beaware if they're listening But the 4
percent rule made popular by plannerBill Bengen years ago where he
researched he said what what's the?
The largest percentage that someone couldtake from their retirement portfolio and
(02:06):
not run out of money over a 30 year span.
Now, of course, he usedhistorical returns, right?
And so there's no guarantee thatthose same historical returns would,
you know, would still be true today.
But what he found was if you took 4percent out, of a retirement account or
really just 4 percent of your assets eachand every year that you would not run out
of money in any of the, you know, in anyof the periods of time that he analyzed.
(02:30):
But again, that doesn't mean thatthe same would hold true today.
So, so just to put numberson it, it's not that much.
Uh, you'd have to have a milliondollars 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.
(02:50):
It doesn't.
It doesn't.
But if you're trying to make dollarslast 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, andso 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 4percent was the percentage he found where
(03:17):
it would, it was the highest percentagewhere 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 interestingor what you think about that?
That means that every other scenarioexcept the worst case he analyzed
Someone made it through those 30years and ended up with money, right?
In fact in many of the cases he analyzedsomeone would have started let's say
(03:40):
retirement with a million dollars startedtaking the 40, 000 inflation adjusted
it each year and maybe ended retirementwhen they died after 30 years with 5
million left, 6 million left, way morethan they started with, which may or may
not, you know, comport with their goals.
If their goals, I'd like toleave my kids a big inheritance.
It's pretty good.
If your goal is, I hate my kidsand I want to spend every dollar,
(04:02):
you've done a bad job if you diewith five billion dollars, right?
I just don't think, we've talked aboutthis before, anybody can bring themselves
to spend their last dollar as a plan.
It definitely is.
Well, that, that gets to the heartof our discussion today, Ed, which is
how do you think about adjusting yourspending in retirement to stay on track?
And staying on track is about spendingand to, to help achieve your goals.
(04:26):
If your goal, again, is I want to, uh,leave a significant inheritance behind,
then dying with a lot of money inside youraccounts, and when I say dying with a lot
of money, I don't mean like unexpected ata heart attack, I mean living a reasonable
life expectancy, going, you know, thingsgoing quote unquote according to plan.
Uh, then you, you, you might haveto adjust upwards your spending in
(04:47):
order to account for that if yourgoal is just to enjoy your retirement
to the fullest extent possible.
Now the old school people, I knowMike, my parents generation, the
World War II generation, theyalways said, never touch principal.
Yeah, that's very good whenyou have an interest rate.
And we're finally back to a meaningfulinterest rate today, but for a long time.
People do think like that.
(05:09):
Well, I never want to see that go down.
Yeah, well, uh, Again, if your goalis to leave an inheritance behind.
That's not a bad idea.
No, the goal, forget about beneficiaries.
I think in those cases, their goal isthey never want to leave themselves
in case there's something that comesup, big cash, you know, medical,
whatever it is, they never want to go.
(05:30):
They want to have that cushion.
But, that cushion effectively meansif you never go below your principle,
you are theoretically going to diewith the amount that you started with,
which, again, Well, that is, that is.
But that, if your goal is not toleave behind an inheritance, you've,
you've, you've shortchanged yourself.
No, that, you can have both.
I mean, they're going to get theinheritance, but that wasn't driving it.
(05:51):
The thing that was driving it,as you get older, you worry
about running out of money.
Yes.
And they never want tosee that balance go down.
So if we think about like ways inwhich people structure their retirement
distributions today, I can think oflike three or four different ways
that people set up their accountsand think about taking distributions.
Like one of them would just be, uh, youknow, a, a fixed dollar amount, right?
(06:14):
So they start and they begin takingLet's say a hundred thousand dollars a
year beginning the year they retire, andthey take a hundred thousand dollars,
exactly that amount, every single year.
Effectively, you know, thisis 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.
(06:34):
The, uh, the, the nice part, if youwill, 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 noincreases is that you can't No, you
(06:57):
won't keep up with inflation over time.
Yeah, but they, they haveriders and stuff like that.
And you pay for all of those things.
You do, so if you, you can certainly addinflation adjustments to an annuity, but
I think there's two things worth knowing.
Like, today, well one, if you add thoseriders, 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'sactually, uh, there used to be
(07:20):
products, I think, Um, but I knowtoday for a fact that we don't have
any true inflation adjusted annuities.
You can get a 2 percent or 3 percent everyyear, but it won't actually take into
consideration the true cost of livingbecause 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.
(07:41):
And that's like the worry free way.
Well, worry free, it might feel good.
But again, if you live a long time, 20, 30years, 100, 000 in 20 or 30 years is not
going to be worth what 100, 000 is today.
So the benefit there is that youhave the guarantee of income.
The downside is Lifetime guarantee.
That's right.
Lifetime guarantee, potentially, right?
(08:02):
But the downside is you're losingsome, uh, inflation protection.
Yeah, spending power.
Yep.
You know, another possibility would beto take, let's say, a fixed percentage
each year, a la, as you brought upbefore, the, the 4 percent rule.
Now, the upside to this is that ifyou do this kind of on a regular
basis, and you structure your initialpercentage at 4%, or some reasonable
(08:26):
percentage that you, you believe isgoing to last, you should be able to
You know, make it throughout your entireretirement and not run out of money.
And also to have apredictable income stream.
Right, right.
Obviously you, you have to figurein what, what your cost of living
is, your expenses, and look at,look at that growing over time
(08:46):
and with inflation as well.
Now, the one thing that ischallenging about that though, is
if you just take a fixed percentage,uh, of your dollars each year.
Then you, uh, you end upa fixed percentage of your
initial dollars, I should say.
You're, you're discounting anychanges that occur in your portfolio.
For instance, if it's a really badmarket, you retire into a bear market.
(09:06):
Oh, yeah, yeah.
You know, taking the, the,that percentage, that flat
percentage that you started with.
Well, the challenge is you, it becomes alarger 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 themarket drops and just to make our
math easy, let's say it drops by 50%,the same 40, 000 out of 500, 000.
(09:27):
It's 8%.
That's called sequence of returns risk.
Indeed.
One of the most important thingsthat retirees should be mindful of,
you know, those initial retirementyears, 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 yearshave outsized importance.
(09:49):
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 percentageof those initial dollars may mean
you're not taking out enough.
Uh, again, it depends upon someone'sgoals, but that's you and what,
that's where I said before, the goalsmean has to cover your spending.
Yes, that's exactly right.
And but someone may say, I, Hey, if themarkets do well, I wanna spend more.
(10:12):
Well, if you're taking out this flatpercentage, 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 justtake out 5 percent of my portfolio
every year or something like that.
The challenge there though, is you have alot of variability in your income, right?
(10:35):
For instance, if your accountvalue is a million dollars
in year one, that's $50,000.
If in year two, the account has dropped to700, 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 ofthat percentage, which is, you
(10:56):
know, further going to erode that.
That's going to cost a living.
Absolutely.
Yeah, and, and can significantlyerode that further.
So, you know, the So, you know what I did?
What'd you do?
Well, we talked about, uh, havingguaranteed income for life and I always
say this in my consumer seminars whenI talk about annuities like you were
talking about, I said the only thingbetter than, uh, tax free income for life.
(11:18):
I think you were going to say the onlything better than income for life.
Yeah, yeah.
Let me explain to you whatyou were about to say.
Yeah, yeah, yeah.
Yes.
Here's what I always say.
Except for right now thatI did set it backwards.
All right.
The only thing better thanguaranteed income for life.
What is it, Ed?
Guaranteed tax free income for life.
You know, when I say that inseminars, people light up witty.
(11:40):
In other words, youjust keep all the money.
Uh, I did it myself because Ihave annuities in my own Roth IRA.
Not only do I have guaranteed income forlife, 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 portfolioin there, but it's a good cushion
(12:01):
against a guardrail, a buffer.
Yeah.
And so, you know, that's one wayin which you can make sure that
you don't outlive your money.
Another way and a way that was madepossible or not possible, uh, popular,
um, by a, uh, an article written anumber of years ago, uh, Jonathan
Guyton, the financial planner madethis, um, largely, uh, You really
(12:24):
raised this possibility was this thingcalled gutters and guardrails, right?
The idea that you would put some bandsaround your your percentage distribution
So that for instance if in year one youstarted out taking four percent you would
make yourself some Decisions at that pointto say hey as long as each year my account
(12:45):
is You know, my distributions are betweenYou three and 5 percent of my portfolio,
I'm not going to change anything.
But if on the chance that the marketsdo poorly, and my distribution
is too high, then I'll adjustmy income each year downwards.
(13:05):
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 istoo high and you're not taking out
enough that you could take out more.
And this, uh, this gutters and guardrailsapproach actually has a, A really, really
(13:26):
profound impact on helping individualsto make course corrections throughout
their retirement and not, um, not to,not only avoid running out of money,
but to avoid drastic changes in theirincome from one year to the next.
So definitely changes from time to timeas markets move and account values change.
But it, it, uh, one of the moreeffective ways, in my opinion at least.
(13:51):
Uh, Helping individuals to makesure they don't outlive their money.
But also spend enough each year.
It's amazing what a few minor changesearly in retirement can do and
how much of an impact on a 30 yearretirement spending pattern it can have.
But again, you have to be able tomanage your expenses and sometimes
that's out of your control.
(14:11):
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 certainlywould be one of them.
Uh, probably, you know, that'sprobably the single biggest one
that most retirees worry about.
Um, you know, there are certain waysof mitigating that, whether it be long
term care insurance or you know, in somecases, individuals who have not, uh,
(14:35):
who have either not accumulated enoughassets or have done certain planning
to make themselves look like they havenot accumulated enough assets, uh, can,
you know, enroll in Medicaid, but thatis 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 thinkpeople prefer choice.
(14:59):
And when you have Medicaid, you oftenlose a significant amount of choice
over the type of care you can receive.
Well, on that happy note,
well, listen, the most importantthing is that people, when they're
looking at making their retirementdecisions, right there, they're
doing so with an eye on the futureretirement for a lot of people today
is, you know, is 20, 25, 30 plus years.
(15:22):
And what you start with on day oneof retirement very quickly changes.
You know, I'm fond of saying when someonecomes into the office, their financial
plan is valuable, it's meaningful, um, andit 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 accommodateand so it's important to develop a
(15:43):
spending pattern in retirement thathelps keep track Uh that helps you you
need to figure out how you're goingto adjust your spending in retirement
To make sure that you're going to notoutlive your money Sometimes that means
spending less today to have a littlebit more buffer later Sometimes that
allows you to spend a little bit moretoday because you have the buffer But
you got to know what you're doing.
Yeah.
The problem is the unknown, like youwere talking about the markets up.
(16:07):
Uh, so the advice is retireinto an arising market.
That's right.
Only retire when there's agood market into the future.
We're going to leave it at that.
Hopefully you're a clairvoyant andyou've picked up some stuff here today
from the great retirement debate.
Ed, always a fun time with you.
Jeffrey Levine is Chief PlanningOfficer for Buckingham Wealth Partners.
This podcast is for informational andeducational purposes only and should
(16:29):
not be construed as specific investment,accounting, legal, or tax advice.
Certain information mentioned maybe based on third party information
which may become outdated orotherwise superseded without notice.
Third party information is deemedto be reliable but its accuracy and
completeness cannot be guaranteed.
The topic discussed and correspondingarguments are those of the speakers
and may not accurately reflectthose of Buckingham Wealth Partners.
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