Dynamic Retirement Spending Strategies Elevate Your Practice

A very popular one as well is the retirement spending stages strategy. This breaks up retirement spending into three different stages.

The first stage, in terms of client behavior, looks at the idea that the first couple years of retirement—or however long we want to define—is typically when clients spend the most. Then we break it up to the second stage, which we can define by clicking into this field. Right now, we have that second stage starting at 75, for example. We then show a slowdown in spending habits, and show an adjustment and a decrease in spending habits by 15%.

Then in the third stage, closer towards the end of life—for them it's 85—we'd show a third and final decrease in living expenses by 5%.

We also wanted to analyze a couple of different other ones, so we're going to activate the spending stages one. We'll select that from the left-hand dropdown, go down to Action Items, and toggle from retirement spending strategies to retirement spending stages. Hit refresh, and we'll see how that impacts their probability of success.

Another key thing to note, still under Retirement Details, is the retirement spending figures. This is a great chart that will visualize over time and show you the total spending in retirement in terms of retirement expenses—especially healthcare, which can be a very hefty cost—and a lot of the other big expenses, including taxes. This is another reference point when we're trying to analyze what is happening with the retirement spending strategies that we're illustrating, and also to paint the picture of what we're actually spending on in retirement.

Retirement spending smile. This is also referred to in the industry as the Blanchett spending smile, but here it's called Retirement Spending Smile. You can retitle this if desired by clicking on the pencil icon, retitling it, and hitting the check mark. For now, we're going to leave it at the default.

The intention with retirement spending smile is the idea that we're going to have retirement expenses still growing each year, but not growing as rapidly as general inflation—and that healthcare costs, as clients get older, will come to supersede the cost of retirement living expenses. This creates a smile when we're analyzing the spending behavior of a client's retirement picture.

In the Retirement Spending Smile page, this is where we can go to define what we want to see in terms of how much we're going to reduce the inflation increase. It's going to look at the retirement living expenses and adjust those, growing them with inflation minus 1%. For example, my general inflation figure is 2.5%. If I indicate 1% right here, that means the retirement living expenses are going to grow at 1.5% each year.

We're also going to toggle to retirement spending smile. Especially for that chart we were just looking at with the healthcare costs, the retirement spending smile is going to be a key one for looking at that spending behavior. Under Action Items, we'll toggle to the retirement spending strategies, click on retirement spending smile, hit refresh, and apply it to our proposal.

At Retirement Details, we can use this dropdown to go back to retirement spending and see how that impacts their spending behavior. As you can see, healthcare is still a pretty hefty cost, especially when we consider long-term care, but it is growing a little more in comparison to the others.

The guardrail strategy, also referred to as the Guyton and Klinger decision rules, is essentially being a little more refined or specific in terms of the idea of fluctuating with market returns or market conditions for spending habits.

One of the key things here is the inflation adjustment rule. If we have this selected, this means we'd show no inflation adjustment to the living expenses if the previous year's return is zero or negative.

With the capital preservation rule and the prosperity rule, this is where we can establish a more specific set of corridors for spending behavior. We can define what that looks like. We can say that this will apply only before the client's age 80, and if their withdrawal rate is 20% greater than the initial withdrawal rate, we'd reduce spending by 10%.

On the flip side, with the prosperity rule, this would also apply before age 80 for the clients. If their withdrawal rate is 20% lower than the initial rate, we'd increase spending by 10%.

Another key thing to note as we're looking at client plans is the ability to be specific in terms of what we want to consider for the initial withdrawal rate. Right now, we have it set to calculated. This means it's going to look at the first year of retirement and the withdrawal rate for that year, which we can leave for now. But this is also a space where you can manually override and indicate that you want it overridden to a specific withdrawal rate. So if we wanted to specify that we don't want it to be anything other than 4%, we can specify that from here. In this case, we're going to leave this as is and keep the defaults.

Starting with the guardrail strategy, we're going to navigate to the Action Items. This is where we go to start curating our proposed plan, which right now is focusing on the guardrails, as the name entails. To do that, we're going to look at applying a strategy, and we'll focus on the retirement spending strategies.

Right now we're using inflation adjusted for the current plan. We're going to illustrate the proposal of looking at guardrails, so we can select that from the dropdown and hit the refresh button. We're going to see how that impacts their probability of success, and also the green bar chart, which references the median trials ending asset value from the thousand trials of market volatility. So you can see what that looks like and how it impacts their behavior.

The Retirement Details tab is another very helpful reference point in terms of what the retirement picture looks like. This is where we can see the income sources and the stability income ratio, but if we click on this dropdown, it's also where we can go to check in on the withdrawal rate. Especially when we're looking at the guardrails, the withdrawal rate is an important factor. For them, in their first year of retirement, their withdrawal rate is 4.2%, which is comfortable in terms of what we want to see for them.

Especially if we're trying to keep in mind if they have a big pull from their assets the first year of retirement—which some clients might—that might be an opportunity where we'd want to create a custom spending strategy in terms of the guardrails, to establish that you want to override it to a specific withdrawal rate in order to be refined in the guardrails. But for this case, this works for their plan.

The next option in terms of retirement dynamic spending strategies is the floor and ceiling strategy. This is essentially creating a corridor for spending, and it's going to allow for a little more fluctuation in terms of market behavior. This is especially key for when we have a strategy of spending less when markets are down, or spending more if markets are up.

The idea behind the floor and ceiling—and the guardrails, which we're going to touch on in a second—the floor and ceiling is essentially limiting the spending reduction to 15% below the initial retirement living expense amount. It is considered inflation adjusted, though. And you can establish that ceiling, which limits the spending increase to 20% above the initial retirement expense amount.

This allows for the spending habits to essentially increase with higher returning markets versus lower returning markets. But we are establishing a corridor, so we're never going to supersede what we're establishing here for these bands.

Finally, we're going to look at the floor and ceiling strategy. Going to Action Items, selecting floor and ceiling from the retirement spending strategy dropdown, and seeing how that works with their plan. As you can see, it's a 97% probability of success. Retirement Details is a great space to go to check in on retirement spending and what that looks like for them.

This is also where we can go to compare and contrast multiple proposals. Right now we're comparing against the current plan, which has an inflation adjusted strategy selected, but we can also use this dropdown on the right-hand side to compare and contrast against other different types of strategies. Especially if we're trying to compare which one might be better suited, we can use these toggles to compare and contrast for that probability of success.

If we go back to our advisor portal and go to Models > Retirement Spending, we can click on Add Spending Strategy to start creating a custom one. It's important to note that what we're creating here can be used across multiple clients—that's perfectly fine—but it can also be used just for a specific client if we needed to make one very niche to their needs, which is what we're going to be doing for the Lannisters, at the very least.

We're going to click on the pencil icon to retitle this to "Lannister Stages." You can retitle it to whatever is the best-suited name. From there, we select what type of strategy we are going to be using. They're going to be following a similar path to retirement spending stages, which breaks up their spending habits into stages.

The first years of retirement, they're going to be very aggressive in terms of spending behavior growing with inflation. Then at the secondary stage, we're going to show them decreasing their spending a little more aggressively than 10%. They plan on cutting back a lot and focusing on just staying at home. The third stage is going to start a little earlier for them, at age 80.

Especially for them, if we're considering the potential of their planning horizon and the nuances of when we're planning that they pass away, it makes more sense for the third stage to start at 80, and they have a little more of an aggressive decrease at that third stage as well. We can modify each of these parameters to reflect the client's true behavior needs.

Once we have that saved, we can go back to our client list and search for the Lannisters. Now if we go back to retirement analysis, we're going to use the proposed plan to illustrate the comparison between the current plan, which is inflation adjusted, versus the one we just curated that is custom to them.

To go down to the Action Items, we're once again going to select our custom strategy from the retirement spending strategies dropdown, hit refresh to illustrate that true-to-client behavior for them. We want to compare against the current plan, so we're going to toggle to the current plan to show that juxtaposition of what their client spending behavior looks like versus the current plan. We can see that difference between the comparison of probability of success and that median trials ending asset value.

We can check in on the retirement details to see what is happening in terms of the retirement picture for income sources, but also withdrawal rate over time, and the retirement spending as well. Under Comparisons, this is also where we can see that information in terms of the comparison of the invested assets, the net worth, and taxes paid. For them and their plan, this makes the most sense.