The Advisor Redefined

You Are Now Your Clients’ GPS

Why retirees will likely NOT run out of money

by Herbert K. Daroff, J.D., CFP, AEP

Mr. Daroff is affiliated with Baystate Financial Planning, in Boston. Connect with him by e-mail:
[email protected]

Human nature promotes survival. If you are running and see a canyon in front of you, you slow down and stop. You re-assess your route. The basic assumption that retirees will continue to spend at the same rate as their funds diminish is in conflict with this survival instinct. In fact, many retirees rely on the required minimum distribution (RMD) tables to set their lifestyle.

The denominator continues to decrease, thus increasing the percentage of the retirement funds that are distributed. However, if the funds themselves decrease in value, so will their income based on RMD. For example, if you keep your funds in cash earning 2%: (See Chart 1)

Notice that the Income goes down just a bit at age 80. Will that be sufficient warning for retirees who don’t rely on the help of financial advisors, the do-it-yourselfers. The Income does NOT start to decline every year until age 85 even though the Retirement Fund is decreasing every year.

Will they notice at age 80 that their retirement fund is down over 20%?

When will retirees start to re-assess their plan (their route)? Will they look to increase the rate of return on their investments, and the risk associated with that increased return? Will they look to reduce their spending habits?
Or, will they just blindly continue to increase their income to keep pace with inflation (assumed here as 3%) even as their account balance declines? (See Chart 2)

Our job, as financial advisors, is to help our clients (while they are working and as retirees) re-assess their plan (their route). We are their GPS. We need to show them the traffic patterns and help them choose an alternative route.
It would be great if our clients saved more now and invested more wisely. When markets are down, that’s a good reason to buy, not sell. Assets they want are on sale. But, sometimes, they hold on to assets too long. All too many future retirees have most of their savings in cash, with effectively negative return net after taxes and inflation.

I wish I had 9-months’ notice of my death, like we have of our birth. Or, get even longer notice. If we knew when we would die (and when our spouses would die) we could make much more informed decisions. But, we don’t. All we have is planning and risk management.

What can we do? We can help our clients save more. We can help our clients invest what they save, consistent with their risk tolerance and risk capacity, to generate a larger nest egg from which to draw their retirement income. Even without saving more, increasing the rate of return from 2% to 3% moves the point when RMD driven income begins to decline annually from 85 to 90. (See Chart 3)

I wish I had 9-months’ notice of my death, like we have of our birth. Or, get even longer notice. If we knew when we would die (and when our spouses would die) we could make much more informed decisions....

But, a 100 basis-point increase on 2% is a 50% increase in rate of return

Taking advantage of higher rates of return available through annuities gives many clients a pension-like income. Very few today have the benefit of defined benefit pension benefits.

Five years ago, my wife and I sold the house where we raised our three children. We moved to an over 55 community where others take care of mowing, raking, shoveling, and plowing as part of our condo fee. Our real estate taxes and condo fees are less than just our real estate taxes were before. Our bedroom is on the first floor. Our bathroom is handicap accessible. We have no problem walking up and down stairs, now. We are ready for the next phase.

For most, as we age, our costs for health care and custodial care increase. But, we will likely travel less and spend less on other activities that we can no longer handle.

Having life insurance and long-term care insurance gives me the ability to spend down income and principal knowing that the principal will be restored for my surviving spouse and leave a financial legacy for my descendants. A financial plan without life insurance and long-term care insurance is just an investment portfolio. An investment portfolio without annuities is self-insuring all of the risk of future income. ◊

 

 

CHART I

Age Fund RMD Income Age Fund RMD Income
2% 2%
70 $1,000,000.00 27.4 $36,496.35 85 $638,507.07 14.8 $43,142.37
71 $982,773.72 26.5 $37,085.80 86 $607,271.99 14.1 $43,068.94
72 $964,601.68 25.6 $37,679.75 87 $575,487.12 13.4 $42,946.80
73 $945,460.37 24.7 $38,277.75 88 $543,191.12 12.7 $42,770.95
74 $925,326.27 23.8 $38,879.26 89 $510,428.57 12.0 $42,535.71
75 $904,175.96 22.9 $39,483.67 90 $477,250.71 11.4 $41,864.10
76 $881,986.14 22.0 $40,090.28 91 $444,094.35 10.8 $41,119.85
77 $858,733.77 21.2 $40,506.31 92 $411,033.99 10.2 $40,297.45
78 $834,592.01 20.3 $41,112.91 93 $378,151.27 9.6 $39,390.76
79 $809,348.69 19.3 $41,935.17 94 $345,535.73 9.1 $37,970.96
80 $782,761.79 18.7 $41,858.92 95 $313,716.06 8.6 $36,478.61
81 $755,720.93 17.9 $42,219.05 96 $282,782.20 8.1 $34,911.38
82 $727,771.92 17.1 $42,559.76 97 $252,828.23 7.6 $33,266.87
83 $698,916.40 16.3 $42,878.31 98 $223,952.59 7.1 $31,542.62
84 $669,158.86 15.5 $43,171.54 99 $196,258.17 6.7 $29,292.26

 

CHART II

Age Fund RMD Income Age Fund RMD Income
2% 3% 2% 3%
70 $1,000,000.00 27.4 $36,496.35 85 $556,302.43 14.8 $56,860.12
71 $982,773.72 26.5 $37,591.24 86 $509,431.15 14.1 $58,565.93
72 $964,086.13 25.6 $38,718.98 87 $459,882.52 13.4 $60,322.91
73 $943,874.50 24.7 $39,880.55 88 $407,550.81 12.7 $62,132.59
74 $922,073.83 23.8 $41,076.96 89 $352,326.58 12.0 $63,996.57
75 $898,616.80 22.9 $42,309.27 90 $294,096.61 11.4 $65,916.47
76 $873,433.68 22.0 $43,578.55 91 $232,743.74 10.8 $67,893.96
77 $846,452.23 21.2 $44,885.91 92 $168,146.78 10.2 $69,930.78
78 $817,597.65 20.3 $46,232.48 93 $100,180.32 9.6 $72,028.70
79 $786,792.47 19.3 $47,619.46 94 $28,714.64 9.1 $74,189.57
80 $753,956.47 18.7 $49,048.04 95 ($0.00) 8.6 $46,384.42
81 $719,006.59 17.9 $50,519.48 96 8.1
82 $681,856.85 17.1 $52,035.07 97 7.6
83 $642,418.22 16.3 $53,596.12 98 7.1
84 $600,598.54 15.5 $55,204.00 99 6.7

 

CHART III

Age Fund RMD Income Age Fund RMD Income
3% 3%
70 $1,000,000.00 27.4 $36,496.35 85 $739,131.14 14.8 $49,941.29
71 $992,408.76 26.5 $37,449.39 86 $709,865.55 14.1 $50,345.07
72 $983,608.15 25.6 $38,422.19 87 $679,306.09 13.4 $50,694.48
73 $973,541.54 24.7 $39,414.64 88 $647,469.95 12.7 $50,981.89
74 $962,150.71 23.8 $40,426.50 89 $614,382.71 12.0 $51,198.56
75 $949,375.93 22.9 $41,457.46 90 $580,079.67 11.4 $50,884.18
76 $935,156.02 22.0 $42,507.09 91 $545,071.35 10.8 $50,469.57
77 $919,428.40 21.2 $43,369.26 92 $509,439.84 10.2 $49,945.08
78 $902,340.91 20.3 $44,450.29 93 $473,279.60 9.6 $49,299.96
79 $883,627.34 19.3 $45,783.80 94 $436,699.03 9.1 $47,988.90
80 $862,978.84 18.7 $46,148.60 95 $400,371.43 8.6 $46,554.82
81 $841,335.15 17.9 $47,001.96 96 $364,431.11 8.1 $44,991.50
82 $818,163.18 17.1 $47,845.80 97 $329,022.80 7.6 $43,292.47
83 $793,426.90 16.3 $48,676.50 98 $294,302.24 7.1 $41,451.02
84 $767,092.92 15.5 $49,489.87 99 $260,436.76 6.7 $38,871.16