Ep #37: An Awe-Inspired Retirement with Joseph Curry, Caleb Miller and Riley Anderson
In this episode, you will learn how to maximize your retirement savings and reach your financial goals faster through innovative retirement planning. This podcast is a true meeting of the minds with a focus on all the ins and outs of retirement income planning.
Caleb Miller and Riley Anderson join us from the “Awe-Inspired and Retired”. Their podcast helps Canadians achieve their most robust retirement possible. On this episode, we look at traditional retirement planning tools like retirement projections. We agree that they don’t provide the full picture. We also agree that exploring dynamic withdrawal strategies allows for a more comprehensive planning process. Specifically, we discuss how the “guardrails” can help clients withdraw more money upfront. Using guardrails also means that when their portfolios drop below the lower guardrail, they can adjust their spending. We all agree that retirement income planning should offer retirees the potential to live their best life.
Caleb and Riley join us from their Investor DNA offices in Calgary, Alberta where Caleb is the Co-Founder and Managing Director and Riley Anderson is a wealth planner.
What You’ll Learn in Today’s Episode:
Exploring different retirement planning strategies beyond the traditional 4% rule.
Analyzing the potential and limitations of retirement projections.
Examining dynamic withdrawal strategies such as guardrails and their benefits.
Ideas Worth Sharing:
“Retirement planning is the nastiest, hardest problem in finance.”
“People mistake a financial or retirement projection as a plan.”
“As many answers as a retirement projection gives us, it also creates that many more questions.”
“A plan is there’s a dynamic component to it.”
Resources in Today’s Episode
Awe-Inspired and Retired – A Planning Retirement Podcast
Your Retirement Planning Simplified Podcast
What’s a Safe Withdrawal Rate Today? – Morningstar
Ep # 32 – Do I Need $1 Million to Retire? Pt. 2
David Blanchett – What is The ‘Retirement Spending Smile’?
Monte Carlo Simulation: History, How it Works, and 4 Key Steps
Redefining the Optimal Retirement Income Strategy – David Blanchett
Guardrails to Prevent Potential Retirement Portfolio Failure – WJ Klinger
Have an Awe-Inspired Retirement
Caleb Miller and Riley Anderson join us from the “Awe-Inspired and Retired” podcast where they help Canadians achieve their most robust retirement possible.
This podcast is a true meeting of the minds with a focus on retirement income planning. We look at traditional retirement planning tools like retirement projections and agree that they don’t give a full picture. We continue to explore dynamic withdrawal strategies that allow for a more nuanced and comprehensive retirement planning process. We discuss how the “guardrails” can help clients take more money from their investment portfolios earlier in retirement.
We’re hoping this episode confirms the power of strategic income planning in retirement. We delve into different retirement income planning approaches. We examine guardrails, and income tax planning and touch on guaranteed income in retirement.
The Nastiest and Hardest Problem in Finance
William Sharp says retirement is the nastiest, hardest problem in finance. But it’s a problem so nasty and hard that it makes us want to solve it. It’s not as simple as saving and investing. There’s a transition point that happens both financially and non-financially and retirement that is as interesting as it is complex.
No Perfect Solution for Retirement
A big part of it is, there isn’t a perfect solution to the retirement planning problem. Many solutions exist but they don’t answer clients’ questions. In addition, they only answer an aspect of it. Where value can be demonstrated is in showing clients systems that give them certainty.
Taking Aim at Traditional Retirement Planning Tools
We want to help people move past financial projections. Many people mistake a retirement projection for a plan.
Essentially, what a planner is doing when they’re creating a projection is creating assumptions. For instance, you have “X” amount of assets invested, and we’re going to assume a certain rate of return. Let’s say 5%. We’re also going to assume 2% inflation for the last couple of decades. We’ll also assume you’re going to live to 90 or 95 or 100. We’re building on all these assumptions, but none may be true. They’re all going to have some variance. And even if we get the rate of return, for example, it’s not going to be a straight-line return. We’re not going to get 5% per year, every single year, or a real return above inflation of 3% or whatever the number is.
A Good Starting Point for Retirement Planning
We think projections are a good starting point, but a projection shouldn’t replace a plan. The next step beyond a retirement projection is we can build in Monte Carlo simulations. This means we’re basically using a set of assumptions as previously mentioned, but then running them through a computer system that’s going to show alternatives. But again, there may be an 87% chance we’re going to be successful. What does that mean to a client? It means there’s a 13% chance that they will run out of money. Or maybe it’s a 13% chance we need to adjust. How do we know when to make that adjustment? As many answers as a retirement projection gives, they also create many more questions.
A projection is static. A plan has a dynamic part to it because a plan changes, and a projection does not.
Going Beyond the Projection in Retirement Planning
The next step is continuing to update the projection. You can adjust from there, but it’s still not giving us a strategy ahead of time where the client can feel comfortable. They still may not feel confident that they know what’s going to happen when markets are bad or what’s going to happen when markets are good.
For example, as a client, you might call your advisor because in the last year, markets have been down. You may be wondering if you should be taking less money out. At that time, the advisor may tell you you’re fine. But then six months later, things are down more. You may call your advisor back and wonder if you should start taking out less money. You still hear that you’re ok. But how do they know when you’re not okay? You want an answer that tells you when you should act. Your plan should be able to tell you the outcome of your decisions quickly or if changes need to be made.
Course Corrections
Here’s an analogy: When an airplane takes off, wherever they’re trying to get, they’re course correcting the whole time. It might be taking off to go to Hawaii. We know what direction Hawaii is, but if you just start the plane in that direction but never make any course corrections, you won’t arrive in Hawaii. Returns are different every year. Inflation is different every year. Every year we want to know when we need to make course corrections to keep moving in the right direction.
The 4% Rule for Retirement Planning
First, it’s not a bad rule. But, for most people, it’s probably not ideal because most people want to live their best retirement life earlier on. They will want to spend more money early on in retirement. The 4% rule means if you have a million-dollar portfolio, you start your portfolio income withdrawals from your portfolio at $40,000. That’s 4% of the portfolio. Then from that $40,000 each year, we’re able to keep up with the cost of living. This means increasing the $40,000 withdrawal with inflation. As the research shows, in almost every scenario, we’re going to be okay if you follow that for a 30-year retirement. The problem is 99% of the time you’re going to end up with a lot more money than you started with. This also means you potentially missed opportunities to travel or spend money on the grandkids early on in retirement because you had a conservative beginning just to make sure you don’t run out of money. The 4% rule probably means you won’t run out of money, but you may be leaving something on the table.
The other problem with the 4% percent rule is that it doesn’t factor in real retiree spending, and this can be its major weakness.
Getting to Level Two in Retirement Planning
What’s a level two planning technique that goes beyond the percent rule? Using guardrails. The guardrails allow the investor to take more money upfront out of their portfolio. We typically use 5%. If we compare that to the 4% rule that’s allowing us to take an added 25% income. That’s extra spending upfront. Then, if the client portfolio stays between the guardrails, we know they can continue to take out that starting amount of up to 5%. They could keep up with inflation if the portfolio’s returns were positive from the previous year. One of the adjustments we might make is if last year’s returns were negative, we wouldn’t do an inflation adjustment. With the guardrails, every portfolio is going to be a little bit different. For example, if we’re taking out over 6% in my guardrails, we started at five, we’re taking it over 6%. Then we hit the lower guardrail because we’re taking too much out of the portfolio on an annual basis to feel like we’re going to be able to sustain retirement and not run out of money. The other side of that is we have an upper guardrail and now if we’re taking out less than 4%, so 20% less than where we started, we know there’s enough of a buffer there where we can increase the amount coming out of the portfolio and withdrawals each year.
The Overall Objective
The overall goal here is to increase the amount we can spend early on retirement because we have a plan in place that we know when we need to “tighten our belt” if things aren’t going well. But also, we know when we have a buffer to do some added things that maybe we weren’t even in the original plans because things are going a lot better than we initially expected.
Penalty Kicks
In soccer, in terms of penalty kicks, if the goalie just stood in the middle of the net for penalty kicks and didn’t try to guess jumping one way or the other, they would stop the ball more than they do. They’re in trouble when they guess. But no one ever does that. But apparently, that’s what the stats show. It’s like investing. Sometimes, the best action is no action. Especially if you set up your portfolio, your withdrawals, and everything based on your goals, and your situation properly in the first place. There shouldn’t be a lot of adjustments. But with the guardrails, you know when those adjustments need to happen.
The Guardrails Continued
They give you the ability to accept some volatility in your spending from year to year. It does increase your ability so that you’re not going to run out of money. You can accept some volatility in spending, which are portfolio withdrawals down the road. By being able to do that, suddenly you open yourself up to receiving more income. You don’t have to take the default approach which is “I’m just not going to spend from my portfolio because I don’t know how long I’m going to live” or “I don’t know what market or inflation is going to do.”
Ratcheting in Retirement
Ratcheting starts somewhere near the safe withdrawal rate.
This could also work for someone who has a larger portfolio and wants to prioritize charity or their inheritance to their kids. They don’t necessarily need to spend everything that they could spend using the guardrails. If they started with 3 or 4% or if it was a million-dollar portfolio and it hits $1.5 million, so 50% larger, then that’s when they bump up their spending. Then they set their ratchet there. And again, if they hit 50% above that, they would then bump up their spending again. It’s a way to ensure there’s going to be a legacy and it’s for someone who wants to prioritize an inheritance or charity and doesn’t need to spend everything that they could spend if they were using the guardrail strategy.
The lesson here is there’s no one size fits approach, but there is a level-two version of retirement planning that moves beyond the projections and is a little more responsive to real-life spending for retirees.
Retirement Questions to Consider
We often say that if you’re in retirement or if you’re a few years from retirement, there should be a few things that you should know. As should your financial planner.
Firstly, how much are you going to withdraw when you retire? Secondly, if you already are retired, how much are you going to withdraw this year or next year? Thirdly, at what point do I withdraw more or less than that amount? The guardrails plan answers both those questions. But the fourth thing is, where do I take that amount from? If I have all these different accounts, RRSPs, (Registered Retirement Savings Plans), TFSAs (Tax-Free Savings Accounts), and non-registered accounts, I’m receiving some government benefits, perhaps a pension, I know how much I need to take – but where do I take it from?
Lastly, what if I need a lump sum? What if I want to buy a new car or have another larger expense? We return to the guardrails. If I take this lump sum, is it going to drop me below my lower guardrail? This answers the question for the client. In many cases, they still stay within the guardrails.
Where do I take my Retirement Income from?
This will be specific to each client. It’s going to depend on what other benefits they have coming in, aside from their withdrawals of pensions, and government benefits. One recommendation to clients is not to take CPP (Canada Pension Plan) and OAS (Old Age Security) before they talk to a financial planner and have a good plan in place. It’s important to prove the value of deferring some of those government benefits. It allows us to get money out of registered accounts before OAS and CPP kick in. Because as soon as we have CPP and OAS that’s just another taxable income source. It’s important to push our taxable income out.
If we’re taking money out of our RRSPs we’re paying more tax. What happens is we try to limit the amount of money, or clients don’t want to take too much money out of those accounts because they don’t want to pay too much tax, then we end up with the issue, especially for our well-off clients, where they have money left in registered investments when they pass away, and half of it goes to CRA.
Delaying CPP and OAS
Delaying CPP and OAS can mean keeping the taxable income below the OAS claw-back. Once a client gets to the point where they must take their CPP in OAS and have the RRIF (Registered Retirement Income Fund) minimum kick in, that RRIF minimum is usually significantly lower. This allows the clients to potentially keep more or all of their OAS as one benefit. But again, we’re trying to level out their taxes over time rather than minimizing them as much as possible yearly. Because it means that we’re going to take away bigger tax hits. The results are more lifetime taxes and what they see going back to the CPP and OAS. It also means less guaranteed lifetime income because there’s a big jump for people when they delay those benefits. They aren’t going to run out of money in their 70s or early 80s. That’s not where they’re going to run into issues in retirement. It’s if they live to 100 or beyond. If we can maximize their guaranteed sources of income that also keep up with inflation, that’s just going to help anyone who ends up living longer than expected.
An Example
An example is a client with a projected estate value of $12.5 million. We took this approach for a client, and it was a net estate benefit of an added $3 million to do this tax planning work for them. We added $3 million added value versus sticking with the typical rule of thumb to defer long as possible. Not everyone has a projected value of $12.5 million, but to the client, that was worth $3 million of value to do that work.
Guaranteed Income in Retirement
When we’re talking about guaranteed income, it means sources of income that someone has that will pay for the rest of their life. Maybe not 100% guaranteed, but more guaranteed than their investment portfolio. It’s not a unique perspective, I think that generally more people probably need more of it. Typically, the only guaranteed income source someone has is their government benefits, maybe the defined benefit pension plan from their employer in some situations. If it’s just their government benefits, they should probably max them out. And the way to do that is to delay them. And that’s probably the most affordable, secure way to get a more guaranteed income as part of your total income.
Guaranteed income is like zinc. You only need a little bit in your diet. If you were to talk to your dietitian or somebody who specializes in nutrition, they’d tell you the same thing. You need some zinc and it’s measured in milligrams. But if you take a whole spoonful, you’re ill. The question is: How much is too much or how much is too little? We believe you should have it, but how you should have it is a different question.
Exceptions to Delaying
Generally, most people will be better off delaying. However, there are scenarios where you’re not going to get the max benefit by delaying your CPP because you retired when you’re 55 and you don’t have enough years, it might make sense to take it early. Aside from delaying your government benefits, where you have the biggest impact is if you have a chance to commute your pension. For most people, it’s probably not the best way to go, but, for example, if you have a family of two government workers, and they haven’t saved much, but they both have 30-plus years of service with the federal government it may make sense to reduce that guaranteed income. There’s something for the kids if that’s important to them, but knowing they still have that guaranteed pay cheque coming in, both from government benefits and a defined benefit pension. But it’s rare to see two people with well-defined benefit pensions.
Asset or Liability Mapping in Retirement
This is where you match your product to what the need is. If you think of wants and needs, there’s a certain degree of elasticity you have in your wants. Perhaps it’s flexible spending that you can’t have with your needs. For example, healthcare as a retiree. I need to spend that to keep myself alive and keep up my quality of life. That’s not flexible. However, something like buying a brand-new high-end car every couple of years is. You don’t need to necessarily make that buy every year.
You should have your needs, or a good part of your needs, matched to something that’s guaranteed for the rest of your life. There are studies from BlackRock that show that retirees that have guaranteed income tend to spend more on average than folks that don’t.
Putting Guaranteed Income into Practice
However, what’s the point of amassing these portfolios if we’re just going to put them on the shelf and watch them? Guardrails and guaranteed income are a part of the equation to help you do that. Because if you have a certain degree of guaranteed income coming in, maybe from government benefits, maybe from annuities, maybe from defined benefit pensions, if you’re lucky enough to have one, at least you have some of that risk mitigated so can be more confident to spend. It depends on everyone’s balance sheet of what you’re trying to cover in your needs and your wants.
An Example
We just did that with a client we recently onboarded. We took $200,000 and just put it in GICs because their plan is they want to spend $20,000 a year on travel over the next ten years. It was a goal that was important to them. We wanted to make sure that they weren’t losing sleep at night if markets were down, thinking they’re not going to get it, even though we have the guardrail set up for all their regular spending for the rest of retirement. We decided to set it aside, so they know that every year it’s going to be rolling over. They take $20,000 and they’re making a little bit of money on it. You don’t want to decide on where you’re vacationing or not based on what the markets did or did not do that year.
Accepting Change
When you retire, you will have to accept that your income will fluctuate. And it’s difficult to accept because many of us haven’t lived our life like that. You spent your whole life earning a steady pay cheque. Many retirees spend their minimums or their government benefits. That’s what they know. And then they end up having an underutilized lifestyle.
The Benefits of Guardrails
Again, going back to the guardrails, they are consistent. They’re designed to not make substantial changes every year. There’s a safety valve in place where we know when we need to tighten our belt or when we can spend more money. With the guardrails, you’re looking at 3 to 5 adjustments throughout a 30-year retirement. It’s not like every year you’re making these adjustments, they’re infrequent. We’re talking about a 10% adjustment. For example, if you’re taking $10,000 a month out of the portfolio and you hit the lower guardrail, you adjust down to $9,000 a month. It’s not like you’re cutting your income in half by any means. And that’s also excluding your guaranteed income sources that we already talked about, which are still going up with inflation every year in most cases.
The Guardrails are Easy to Understand
Sometimes when I’m working with a couple, there’s a spouse who’s usually not as involved in the conversations. However, when introducing guardrails, using a visual instead of talking in percentages helps. We can show clients when their portfolio drops below this amount, that’s the lower guardrail. If you hit this upper amount, that’s the upper guardrail. You can take more money. Using that visual and explaining everything we just went through, those clients that were not as engaged, became more engaged. Often, it’s the first time they understand how much money they can spend.
Investing is full of emotion and often the fault is to want to change something when it feels like things are changing in the market or the political spectrum or the economy. If that’s all changing, maybe we should change something. But a lot of the time not changing anything is better and the guardrails make that clear.
A Move Toward Nuanced Retirement Planning
The only other thing I would add, which we’ve been saying this whole time, is to remember there are nuances in retirement planning. We call it level one. There’s a second level beyond that. If you’re doing no planning, good for you for listening to this now. You’ll learn some steps you could start taking. If you’re working with somebody now, you’ll be armed with some questions to make sure you’re getting the most out of that relationship.
At the end of the day, we can’t remember how many people have come to us to say, I didn’t get advice before because I was scared, I would be judged or embarrassed by how little I know. And they never get advice because they don’t want anybody to judge them. If you’re listening to this, you’re giving yourself that knowledge. It lets you know what questions to ask and get the right advice for yourself.
If you like Your Retirement Planning Simplified…
Never miss an episode by subscribing via Apple podcast, Amazon, Spotify, Stitcher, Google podcast, or by RSS!
Whenever you’re ready… here are 2 ways I can help you with your Retirement Planning:
Are you ready to retire? Use my FREE Retirement Readiness Calculator to run your numbers to see if you’re truly ready to retire.
Book your Intro Call with me to see if my expertise matches your situation. If I’m not the right fit for you, I will happily point you in the right direction to get the advice you need.
DISCLAIMER: Investment services are provided through Matthews and Associates Investments of Aligned Capital Partners Inc., an approved trade name of Aligned Capital Partners Inc © Podcast Abundance | podcastabundance.com (ACPI). Only investment-related products and services are offered through ACPI/Matthews and Associates Investments of ACPI and covered by the Canadian Investor Protection Fund. Tax planning, financial planning and insurance services are provided through Matthews and Associates. Matthews and Associates is an independent company separate and distinct from ACPI/ Matthews and Associates Investments of ACPI. Matthews and Associates are not licenced tax professionals, and you should consult with your tax advisor before acting on any recommendations.