Retirement Planning Withdrawal Strategies
I read articles regularly that discuss optimal retirement withdrawal strategies.
I think these articles are great but are probably best kept in the academic world. In other words, they should not be given to people looking at retiring.
I have a mate that was forwarded one of these articles by an advisor as the basis for their retirement planning decisions and asked for my thoughts. Don’t get me wrong, it’s great that this financial advisor is staying up to date on the latest research, but I think there are two serious problems with it.
1. This particular retirement withdrawal strategy is only optimal for the previous years tested. Thirty years from now, the optimal numbers will be something different.
2. This will shock everyone, but when it comes to retirement planning, we are all just guessing.
We don’t know what the future holds in terms of various market returns to know whether a certain allocation or withdrawal strategy is optimal.
In addition, we don’t know what is going to occur in your life that will inevitably require changes.
Telling you (or even implying) that there is an optimal allocation or withdrawal strategy exhibits far too much certainty for my comfort. I’m not sure any advisor should speak of any retirement planning decision with the level of surety required to call something optimal. Regardless of time spent planning, it’s still just a guess. This is primarily due to the fact that retirement planning is an ongoing process.
While any individual day doesn’t seem to move too quickly, our lives change at an alarming rate. Our health changes. Friends and family members pass away. New family members are added via new grandchildren & marriages. The markets change. Large unplanned expenditures pop up from time to time. Your wishes for what you’d like to accomplish with your money changes as your perspectives change. And like we have experienced in 2020, a global pandemic that has caused havoc for many, with financial plans significantly impacted, employment situations - whether it is reduced hours, reduced wages, or even loss of employment, and investment markets & superannuation savings adversely affected.
If planning were a set it and forget it activity, I’d be out of a job. Anyone that thinks that retirement planning is a static, one-time decision or that there is one “optimal” plan that is known in advance is sorely mistaken. Retirement planning is a moving target and has too many variables that are impossible to know.
I prefer to get the big rocks in place and adjust a your financial plan as time goes on. Pairing essential expenses with guaranteed incomes and discretionary spending with portfolio income. Building a two bucket income strategy that you can actually understand and stick with. Ensuring you have a Social Security (Centrelink or Age Pension) strategy that reduces overall income risk to the family while accounting for income immediately upon retirement. Establishing a aged care strategy that accounts for your retirement lifestyle. And quite a few more.
The point is that I want strategies that account for the ebbs and flows of life. Nothing is exact. But because of what the financial planning industry has encouraged you to expect, many often anticipate a 50-page “optimal” financial plan.
I’ve come to think that this 50-page “optimal” plan is not for you but for the financial advisor’s compliance purposes or the licensees peace of mind that the advisor has provided a deliverable that a client can touch and feel. Maybe there is perceived value there. “Boy, it sure looks like this advisor has done a lot of work for me.”
I could print out 50 or 100-page plans all day every day but the volume of paper doesn’t make it valuable. I personally prefer various Excel spreadsheets & key information, that I’ve designed specifically to serve my retired clients illustrating various pieces of their plan. By law I have to provide my clients with a 50-page plan out of a financial planning software program to ensure that clients are comfortable with our strategy and I have ticked the boxes to meet my obligations as a financial advisor. However, the amount of clients that I have had over the years that do not read the document or tell me they will not read it, is overwhelming. This is why I have implemented a short-form version or blueprint of the financial plan, to ensure each and every person I provide advice to understand our strategies, how we are adding value, the associated fees, and the next steps.
I think it comes down to the fact that clients inherently know that retirement planning is all a guess. It’s an educated guess that takes into account everything going on in a client’s life at that moment, but still a guess nonetheless. Maybe people prefer the word estimate or probability – I’m not really sure, but I tend to call it like I see it.
The best part about retirement planning being an ongoing process is that it allows me the opportunity to be a significant part of a client’s life. I love being a part of the family. Understanding your story and situation. Whether that’s sharing in the feeling of a child/grandchild being born or even graduating from university, or helping a client fund the renovation of their home to allow for easier access. The fact that retirement planning isn’t a one-time decision allows me to become part of their lives and that is special.
My only point here is that “optimal” retirement decisions are only known through the rear-view mirror. True retirement planning is a series of well thought out, ongoing decisions that takes into account everything that is going on in a client’s life as it’s happening. Assuming it’s anything other than that is probably a recipe for disappointment.
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