How much can I take?

0:00 Welcome to Something More with Chris Boyd. Chris Boyd is a certified financial planner practitioner and senior vice president financial advisor at Wealth Enhancement Group, one of the nation's largest registered investment advisors. We call it Something More because we'd like to talk not only about those important dollar and cents issues, but also the quality of life issues that make the money matters matter. Here he is, your fulfillment facilitator, your partner in prosperity, advising clients on Cape Cod and across the country. Here's your host, Jay Christopher Boyd. Welcome to the program. Glad to have you with us. We are available on video as well as audio. You might be used to listening to our podcast, available wherever you like to listen to podcasts, but we're also posting our videos not only on YouTube, but on our own web page.

0:52 You can find that by going to somethingmorewithchrisboyd .com as well as the Wealth Enhancement Group YouTube page. Well, that being said, Jeff, let's introduce our topic today. We've got, inspired by an interesting Morningstar article, but you know, I was thinking the topic here, we've labeled it, How Much Can I Take? And I started thinking people might be thinking we're just fed up. I'm mad as hell and I can't take it anymore, you know, kind of a thing, you know. They could think that, but that's the beauty of the title, right? When it has more than one meaning.

1:33 Yeah. So that's not really what we mean. Chris isn't mad. Mad. Although you could, are you mad? Are you mad? Yeah. All right. Let's hope not. But it is a common question. Like, I mean, people and during their accumulation phase of their lives, they're saving their 401ks IRAs and saving in brokerage accounts and investing and, you know, paying their way, building their pay, hopefully paying off their mortgage, all these things that people are trying to do to get to this retirement dream. Right. And so they, what's my number? How many times do our listeners hear that?

2:13 Clients want to know what their number is, meaning how much do they need in their retirement assets to be able to retire? And that really means is how much can I take from my retirement assets on a regular basis to replace my income so I can live that retirement lifestyle that I've worked my tail off to be able to do? Because if you, that's the goal, right? That's the dream. That's the dream of retirement that I can accumulate enough assets or cash flow from other sources to be able to live 20, 30, who knows how many years, maybe longer, in a lifestyle doing the things that I want to do, spending, back to the previous episode, recent episode, spending my time doing things that I want to be doing.

3:08 And I think most, most of our listeners are probably educated listeners, meaning I don't think you listened to us, unless you just came across this for the first time, which if you did, welcome. But most of our regular listeners are, you know, students of this, right? They're clients who want to know what we're doing, or they're people who are thinking about hiring an advisor. But I think most of you... Pay attention to financial issues, personal finance, one type or another. I think most people have in their head, if they're somewhat educated, or have done some reading is all right, well, I can take 4% a year, there's an old study that says I can take 44% a year and adjust for inflation.

3:52 And my money has a good percentage of not running out over a 30 year period. High probability of running of being in and that that 4% rule that we often talk about was originally designed around a couple age 65. Right. And the notion of how long they would live. And it wasn't necessarily that you wouldn't spend down on principal, it was just that you wouldn't run out of money before you passed. Right. And so thinking about the joint life expectancy. Well, over the last decade, there have been a lot of maybe less than that, even there's been a lot of renewed attention to this question, particularly when interest rates were, you know, near zero.

4:36 And does that affect what people can do as a withdrawal rate? We've had in the midst of the last decade, you know, the 2000s, I guess that's more than a decade, sorry, the first decade of the 2000s, where we had disruptions in the markets and we had then the financial crisis. And, you know, was there essentially this lost decade of equity performance? You kind of look at those kind of considerations and people were saying, oh, I wonder if maybe that that same 4% rule applies to add to that the complexity that people are living longer.

5:18 Right. There's more people turning age 100 than we used to have. You know, I mean, there's that issue of longevity. And of course, with longevity comes, you know, the potential for higher costs for health care, you know, long-term care considerations. But putting that aside. Recently, we had this bout with inflation. And we've had inflation at some point. So costs are going higher. So people want to withdraw more. There's a lot of different approaches to this. You know, we don't talk about guardrails or any of these kind of things, but just this notion of withdrawal rate is one that Christine Benz, in this article, we're fans of Christine Benz.

6:00 She's been on the show, right. And does a great job when talking to people about personal finance. We kind of parrot some of the things she talks about with buckets, you know, that notion that we buy into that notion as a way to think about varying degrees of risk as we think about how people want to structure their access to capital and their investment strategies and so forth. So in any case, she had this topic revisited in this article on Morningstar about how much one can think about a withdrawal rate.

6:44 And I think one of the challenges becomes, you know, do we think about this in generic broad terms? Oh, what's that rate? Is it 4 percent? Well, first off, they do seem to offer a, well, what's the new number, you know. But then there's a little more nuance of, well, how old are you? How long are you going to live? How much risk are you taking? Some really interesting things. So even in the original 4 percent rule, you know, I think as I opened it, my comments were most people probably have heard of it, but they don't know that you started at 65, right?

7:27 Yeah. They don't know the asset allocation model that was assumed underlines, which was a 50-50 portfolio. So it's a good point. She goes into some good detail about the different levels of equity investment. And it's, you know, before I read this, I had the assumption of, well, if you're taking more risk, then the theory would be you'd be able to have a higher percentage. And if you took real low risk, your percentage would be really low because you wouldn't be getting the growth out of the equities over a long period of time.

8:07 But that's not exactly what the article came out with. That was really interesting. Russ, you mentioned there was some thought process behind why it was that higher equity weights might not be given as much room for withdrawal as Jeff was just describing you'd expect. Do you want to elaborate on that? Yeah, I think they use their Morningstar capital assumptions for the next 30 years. And some of those numbers return assumptions have come down a little bit since last year. So I don't have the numbers in front of me, but I think for large cap growth equities, it was around seven, seven points.

8:55 Where is it? I don't see here. It was around seven or seven and a half percent for large cap growth and a little bit higher, a little over eight percent for large cap value. Which is a little bit of a disruption from, and I think a big part of that, I'm just going to elaborate a little bit, is because of valuations. We look at, we talk about this a lot, like the PE ratio associated with some of these large cap names is pretty extended.

9:38 And I think that's a part of that assumption that they're overstated. There's going to be a reversion to the mean and therefore their performance will not be as high as we might have expected, given that we've kind of already gotten some of those returns is the concept. OK, so the question becomes is, will the innovation allow that to be greater than expected or to move that rate higher than it has historically been? Everyone's always reluctant to say this time is different.

10:19 That notion that it's going to be different than it used to be. So that being the case, there's an assumption of lower returns from a higher equity weight, perhaps, than maybe historically being the case. And with higher degree of equity comes a greater degree of volatility. And if there's a higher degree of volatility, the probabilities of success get impacted. Right. So the reason they're choosing where this success rate is getting diminished is because of that potential for a higher degree of volatility, maybe not as much income return as historically has been the case because of the perception of extended valuations.

11:15 It's interesting dynamic to evaluate. Yeah. Yeah. So. So let me put an example on that, if you don't mind, Chris. Yeah, go for it. So we talked about the 50-50 model that was used in the 4% theory, right? Yeah, over 30 years, right, was the now the common analysis. So if you go to their chart and I'm going to post this article, which includes this chart that I'm talking about right now in the show notes. So if people want to go and read the entire article and dig into the chart as well, they can certainly do that. So if you look at the 50% equity weighting and you go over to 30 years, that brings their suggested or their model.

12:03 With all rate, the purpose, the rule, the 4% rule now would be the 3 .7% rule and that notion that you could withstand that. You know, one of the things I often wonder and I don't recall the details of, does that mean, Jeff, do you and Russ, you might know if. I start off with a 3.7% rule. Sure. And the portfolio value declines as I erode principle. Does that mean I'm taking a 3.7 % on a smaller amount or am I taking the amount I started out as 3 .7% annually over the 30 years in this case?

12:50 Well, as I understand it, you first of all, you pick a date like the end of the previous year. So in our example here, if you, if you pick 3.7 in 2024, you would have an account balance at the end of 2024 and then you would adjust the 3 .7 to inflation and then you would take the 3.7 based upon that. And if the market went down, I believe that the 4% study rule is that you would take the 3.7 if you were on a stagnant rate, whether the market went up or down. So you'd take the rate, not the dollar amount. That's right. And I think that's a challenge for a lot of people, right?

13:31 Because they would be willing to adjust their rate, you know. And the other thing is, too, I mean, it seems that doesn't seem to jive with me because as I think it's got to be somewhere that there's a fixed number, because as time passes, you wouldn't have the worry of asset depletion if you're always only taking 3.7 percent. But you do adjust it for inflation and that's typically up. Oh, yeah, that's a good point. All right. I'm following you. Yeah, right. So. So we talk about this in shorthand, right? Right. And say, oh, OK, therefore I can take X dollars. And rarely do we have people then say, I'm going to reduce my dollars I take because of inflation.

14:17 They always say, OK, that I could just for simplicity, a million dollars of three point seven, that's thirty seven thousand dollars I can take per per year. Right. And then, OK, next year I'm taking three thirty seven thousand plus inflation and so on and so on and so forth, eventually eroding my million dollars. In this case, you're saying, no, no, you'd have to say it's three point seven percent plus, you know, two percent on the inflation. So that's three point nine or whatever, whatever that really is. But you follow the point and then on on whatever the value is on that year.

14:58 So my my rate might incrementally increase each year by a modest percentage to adjust for inflation. But the dollar amount is going to be subject to what's what's the starting principle? What's the starting value of of the account that year? I got a little bit in the weeds there. Sorry. I don't know if that made sense to people. It does. And it emphasizes, you know, that this is a dynamic thing. I think it's I don't think anyone should just set a rate and assume it's going to work. You have to monitor, you have to look at this in your annual review with your financial advisor. And nothing in life is 30 years predictable with absolute certainty, including your own cash flow.

15:42 Yeah, I mean, I think we use we use different approach often in terms of thinking about this. We we do talk about this as shorthand for people as a relevant, you know, something to have in mind. But as a practical reality, we like to model it out on financial planning software and update that as we go. Right. As the numbers change, markets rise, markets fall, account values will adjust. Withdrawals have taken, you know, their toll. And we want to look at how does this forecast routinely of are we going to have enough? Are we going to meet our goal, which is to say most people's goal is not to run out of money.

16:23 You know, maybe even to have something left over, depending on their their state wishes, you know, they want to be able to pass money on. We talk about this. We haven't talked about in a while, but it's probably worth bringing up now is the concept of the retirement smile. Yeah, where most I think most people, not all, but most people have a couple of periods in their. Retirement that they're spending more or spending less, if you will, when you first retire, I think you're I think you're going to spend more because you have built up demand for activities, for vacations, for renovations, for whatever it is, you know, you've been planning for this date of retirement and you've been excited about it.

17:10 And usually not always, but usually those things that you're excited about have a cost to them. You know, I'm going to Europe for a month. I'm putting a new addition on the house. I'm buying a new car. I'm taking up this hobby, whatever it is. So the the kind of concept of a smile, if you can draw a smile with your finger wherever you are, the the beginning of the smile and the end are higher. And so that the theory behind it is you're spending more in the beginning of your retirement and more at the end of your retirement and the the end smile may not be happy, but the end smile is that you probably have more uncovered medical issues, things that aren't covered by insurance.

17:54 So maybe you need some help in the house from someone to help you clean to maybe even some home care or long term care. Yeah. And these cause your expenses to go higher. Right. I think you're right, though. We we routinely find that when we talk to clients about their expenditures, their planned expenditures, I'm I'm fairly sure most people kind of overestimate their expenditures by saying some of their expenditures by saying what, at least for some of their goals, they'll say, oh, I'm going to spend X dollars a month for travel or a year for travel.

18:38 And will they really travel as much as they like have their goal number? Well, I see don't. Yeah. Oftentimes they don't. Right. On the other hand, you know, they might say, well, I'm going to spend X dollars on a car, but maybe cars costs go up more rapidly than they might expect. So, you know, there might be some offset there. But what we do find is, to your point, is that as people settle into retirement, some of their costs of living have gotten more modest, right? They're they're they're just not spending the way they did. You know, they're they just have a more modest need relative to what they might have expected.

19:26 That being said, too, I would I would say , you know, I've come across some academic stuff where they say, oh, you know how much you're going to need. And I find a lot of times people will say, oh, I'm only going to need, you know, 75 percent of what I'm going to spend now. And I think you have to really be careful about that. You know, what is what? Why is that? What what is going to change? Is it because you're you've paid off your mortgage and now you don't have the mortgage and you just timed that so that you could do that? All right. Maybe that's legitimate. Yeah. OK, if that's the case, maybe a lot of people just keep a mortgage for a really long time into retirement.

20:09 And that's probably not going to you know, you're not going to be dropping 75, you know, to 25 percent of your costs. Well, I won't be commuting. OK, not going to be commuting, so let's go somewhere, though. But you've got more time on your hands, right? What are you going to do? You're going to spend some money. And usually those things you do cost money. Yeah, exactly. Or a portion of them. Exactly. You know this. There's a reality, you know, we're going to go out to lunch more. We're going to do we're going to go, you know, have some fun at some occasion. There's usually some cost. Yeah. So just that's one of those things that I think is a challenge, like the four percent rule.

20:52 You know, people that assumption of how much do I how much am I going to spend? Oh, it's less than you did in your working years. Maybe. Maybe not. I like to try to plan for if people have a lifestyle, what they spend. Let's presume they're going to spend something similar. Yeah. And then, yes, if we want to say, oh, we got the mortgage ready to expire on a certain date. OK, we can we can plug that in properly so that expires. Out of their cash flow. And then, oh, they have a car payment, but then it stops and then they buy a new car and we can we can model those kind of things where they actually get added in and out of the cash flow.

21:33 How often do you buy a car? You know, every five years, every 10 years. Well, differs from one family to another. But, you know, these kind of things, you have to give thought to what's what's realistic. I think clients are they understand those. They can focus on when do you buy a car and, you know, when does your mortgage get paid off? Some of the ones that they seem to struggle with is do you plan on helping your family, anyone in your family? They kind of they usually look at each other and like, maybe we should have talked about this. And those can those we see, you know, we see some difficult situations where people can be too generous or they can be too eager to bail out.

22:19 Not literally, but maybe to bail out. Figuratively, anyway, to step in, to assist a child, adult child who had a setback, right? Whether it's a divorce or a job loss. Yeah. Rush, you got any doubt to that? Yeah, I mean, I see it a little bit in my family and people in my life that we've talked about this recently, that as I'm not a parent myself, but as parents and the parents I know will bend over backwards for their kids, a lot of them. Yeah, we see it a lot. And sometimes, you know, to their own detriment or the detriment of their financial plan and having a big picture view where they're not going to run out of money.

23:00 So adding all those those pieces into the equation is really important. And that's that's what we do with a financial plan. We can look at it and we can say, OK, is this going to be a sustainable level of support that you're providing for your child? Or is that something if that's something that the client would like to do? Let's see how that would work or let's see what that would look like. Maybe it's something they hadn't thought of before, but they would like to do. So one of the challenges for us is, you know, we can look at something and say, oh, that's not a good financial decision. And we you know, we can try to offer counsel. But our role isn't to be the decider or the and we can't create magic either.

23:46 You know what I mean? But so our role isn't to be the one who says you have permission or not. Yeah, it's not a value judgment. It's ultimately their money, their decisions, their values. Right. But it becomes challenging at times when you see someone's on a path for a problem and you want to try to warn them off of that path. But ultimately, you know, let's face it. A lot of family, a lot of family comes first and people are prioritized that and and they want to do all they can to get their family members on track and help them out out of difficult times, going through a divorce or getting off, you know, getting launched, you know, that kind of thing.

24:31 So, you know, you can you can see how that happens. But at the same time, it becomes one of these things where, you know, we've we've we've all talked about this. We've done shows on this topic where just there's times when you just see the the risk that people are putting themselves into for their own financial security. And, you know, the challenge of how do you help them navigate this is often difficult. But it comes back to this topic of, you know, withdrawal rate and, you know, responsible use of funds and how much we will talk to people at times about deviating from a responsible withdrawal rate, for example, for maybe the early start of their retirement with the intention of saying spend a little more now and you'll have to spend less later because your social security or pensions or whatever will kick in with more that it can be desirable to delay.

25:33 Right. Right. Counterintuitive to a lot of people. But it's for many, it's the right thing to do. So ultimately, though, our role is to just try to give you knowledge and power, you know, that notion of like that. Once you know what the options are, that can be empowering to you to make decisions and help you to navigate some of these challenging choices. But ultimately, these are choices that are our clients and will give you guidance and our our best judgment and how we can based on what you decide how can we help you figure out what's the best path, what to do next?

26:14 You know, that kind of thing. But ultimately, these are choices that come down to the client's preferences and priorities. Yeah, absolutely. It's and sometimes it's behaviors, you know, not everyone has, you know, I think sometimes we end up finding ourselves having made choices and we go, oh, I wish I thought about that differently or maybe I shouldn't have done that or whatever, right? Right. And that's that's kind of past tense. So it doesn't you can't live in the what if if only whether it's, oh, I should have saved more, I should have spent less or, you know, some particular any of these kind of things. You got to go from where you're at.

26:56 And how do we how do we move forward given where we're at? Yeah. Yeah. Yeah. I think this article was good because it discussed many of these topics, including the one you're talking about, spending more early in on your retirement. It's also important to think about. Your own health, your own family history. These things are really relevant. No one can predict, you know, the day we're going to leave, leave this earth, but it's important to plan for it. And how many times, Chris, have we heard I'm not going to live that long? Yeah. You know, so I mean. And I've heard that many times from people who lived a lot longer. That's what I mean.

27:37 Right. Yeah. So a lot of dynamics here in this rule for which is, you know, commonly the rule. Yeah, it's it's OK to use it as a guidepost. But, you know, all these rules of thumb are very individualized. And really, you shouldn't rely on them to structure your own kind of DIY financial plan. You should really get some help and model it and look at these many other things and many that we haven't touched on to see how it would really impact your your own individual plan. Because the last thing you want to do is not have money. You know, later in life, you find your.

28:18 Yeah. When you might need it and you might have to downsize when you don't want to downsize. You might not be able to help somebody you thought you could help or whatever the situation or not. You might not have the help at home and you might have to make another alternative, which is something you really didn't want to do. So, yeah, yeah. Get some help with this decision. And it's not a stagnant decision. It was one that it's one that needs to be reviewed annually anyway or periodically to make sure you're on course. Yeah. Good points. Really good points. So thank you for bringing this article out. Check it out in the show notes. As you said, I think people will find that chart or grid or whatever in the middle of the article.

29:00 As interesting as we did. However, you know, keep in mind how it's supposed to work, you know, and that also that notion that none of us knows how long we have. So you want to pad your numbers probably to make sure you don't plan, you know, assume a life expectancy or a time horizon that's different from what you might really want it to be. All right. With that, thanks, everyone, for being with us. Don't hesitate to reach out to us as we can be a resource for people dealing with financial planning and portfolio management. We're happy to to speak with you when the timing is right.

29:40 Until next time, keep striving for something more. Thank you for listening to something more with Chris Boyd. Call us for help, whether it's for financial planning or portfolio management, insurance concerns or those quality of life issues that make the money matters matter. Whatever's on your mind. Visit us at something more with Chris Boyd dot com or call us toll free at eight six six seven seven one eight nine zero one. Or send us your questions to AMR dash info at Wealth Enhancement dot com. You're listening to something more with Chris Boyd Financial Talk Show Wealth Enhancement Advisory Services and Jay Christopher Boyd provide investment advice on an individual basis to clients only.

30:22 Proper advice depends on a complete analysis of all facts and circumstances. The information given on this program is general financial comments and cannot be relied upon as pertaining to your specific situation. Wealth Enhancement Group cannot guarantee that using the information from this show will generate profits or ensure freedom from loss. Listeners should consult their own financial advisors or conduct their own due diligence before making any financial decisions.