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Episode #533 - The State of Retirement Planning with Michael Kitces
Roger: The show is a proud member of the Retirement Podcast Network.
"The aim of argument, or of discussion, should not be victory, but progress."
-Joseph Javier
Hey welcome to the Retirement Answer Man show, Roger Whitney here. This is the show dedicated to helping you not just survive retirement, but to have the confidence, because you're doing the work, to really lean in and rock retirement. By day, if you're new here, I am a practicing retirement planner walking this journey with clients, and over the last 10 years on this show, I've used to sharpen my saw and skills on my mastery journey, but also to noodle with you on how do you actually do this retirement planning well, so you can get on with your life, which is the whole point, right?
This week, we're going to have a conversation with Michael Kitcis from the kitcis.com blog well, really, ecosystem, which is one of the most innovative thinkers about retirement planning and financial services, on the state of retirement planning. One thing that will come out in this, which is important for you to know as a consumer, but very important for me as a retirement planner to know, is that there is no one right way. No algorithm has been written that solves retirement for you, me, or anybody that I work with. And that's important to remember, so you can be a better consumer and be more critical of the process that people are using. I, as a planner, can be humbler and focus on quality of decision making in iteration in my framework, that is Agile Retirement Management, using agile project management. But I think that's really important to acknowledge here is that this is a progress of, yeah, the math, because the math is the math, and it's really important but there's a whole other side that math can't solve for, and that really comes out through our conversation.
We just completed a listener survey of about 2, 000 replies, or submissions. Thank you so much for sharing your feedback. Starting next week, we're going to play with some changes. I'm always iterating, one of my favorite words, so some of the things that you're going to see going forward that I'm going to be testing and trying is, one, more focus.
What I mean by that is whatever the title of the show is, that's going to be the first segment, whether it's a question or an interview. So that way, you read the title, you come to the show, you get that, and then you can stay for interviews or answering your questions.
Number two is going to be some more segments that are going to rotate in and out.
One is going to be fundamentals, so we can start to build up some base knowledge of the things we need to understand. to be better at rocking retirement. Number two is going to be some mini case studies. So, we do the Retirement Plan Lives, the full month-long case studies. I think we're doing the next one in June; I believe already have that person selected. That'll be fun. But we're also going to do some mini case studies of people taking concepts and actually applying it and taking baby steps forward to rocking retirement. I actually have one that I'm going to share next week.
Then lastly, we're going to have a rotating hot topic segment. So, when there's a big legislation change or something impactful to the landscape of retirement planning, we’re going to discuss it.
So, some changes we're going to have, but for now, this entire episode is Michael Kitcis and I chatting about the state of retirement planning.
Michael Kitcis and I have been friends, acquaintances for the last eight or nine years, and we've shared the stage together. We've had many chats around the state of financial planning and retirement planning. His very popular Kitcis blog is a go to for financial planners and retirement planners.
He is a former advisor. He advises in a large RIA firm and has a wonderful platform on a lot of the techniques and technical side of financial planning and retirement planning. By the way, if you're not signed up for our email, 6-Shot Saturday, we always put links to some of the resources that we talk about as well as a summary of the show. If you like the show, you're going to love 6-Shot Saturday. Comes out every Saturday morning. You can sign up for that at 6ShotSaturday.com, just enter your name and your email and you'll get a link to Michael Kitcis's blog in this week's other things that we may talk about. But Michael is a very deep thinker and I love his take in constantly exploring this.
I think you're going to find in this chat with Michael that he has progressed from the math only aspect of retirement planning and starting to see the more holistic part of that. I think this is a great chat on the state of retirement planning.
PRACTICAL PLANNING SEGMENT WITH MICHAEL KITCES
I'm so excited to hang out with you to talk about the state of retirement planning. You think a lot on this topic, initial thoughts on retirement planning and where we're at.
Michael: To me, I think the most interesting is I guess I look at two threads. I feel like have really cropped up over the past I'll call like five to ten years I'll sort of do like one's kind of from the nerdy research ends for folks like me that love living in spreadsheets and then sort of the like the broader framing of retirement. So, the end I think that's getting interesting from the research side of retirement is how much impact comes from a little bit of flexibility in your retirement in your lifestyle and what you're doing and your ability to adapt to change to a changing world?
A lot of the original research that was done in retirement, including from folks like me, I built and published some of these studies as well. There's a part of this. It's just kind of the parsimony of what you have to do when you're beginning to build models in research like we start with the framework that's usually like this standard of living and then we're going to see what we can do to maintain this standard of living over your lifetime as we look at what happens with markets and how you're invested and what the spending level is in the first place, right? Those core retirement levers that we tend to move. I think it's only over the past five to ten years that we've now found, like, oh, sort of, oopsie, my bad, in the research context, like, that fundamental assumption of here is my, like, inviolable set standard of living, it turns out that was a highly constraining assumption.
When we introduce a little bit of flexibility, right? Sort of the simplest sense, like, hey, maybe when times are awful and it's like the second great depression, I'll like eat out less for a while cause none of my friends can afford to do it at that point anyways. I'm like, I'll make it up again when times are good.
It turns out even just a little bit of that flexibility. Quite materially moves what the safe spending level is in the first place. So, like 4 percent rules start becoming 5 percent rules and even more significantly underlying that enemy kind of highlighting a collective gap in the marketplace is the moment you introduce flexibility to retirement spending, all these questions start coming up like, well, what's the parameter?
Like, when do I cut and how much do I cut and what should I cut in order to get back on track? A lot of our retirement or spending tools, like the calculators, the planning software, we use advisors, a lot of the things that are available directly to consumers as well, weren't really built with a bunch of like, if this, then those sorts of statements.
I mean, you can do it. It's not actually even the most complex thing to program. But we didn't really build it that way by default. From the research end, the most striking thing to me is what we're now starting to learn about introducing flexibility and the way it really starts to change some of the retirement planning conversations when you introduce flexibility.
Roger: I would totally agree with that from my perspective of actually practicing it in terms of walking life with clients. We had a professor on the beginning of March that I contacted who wrote a book It's Not Complicated, and I think this is where this disconnect came from a research perspective, and I'd be interested in your viewpoint on it.
As practitioners, we approached it as a complicated problem, which by definition is solvable, and his research was on the difference between a complicated problem, which is solvable and a complex problem, which is not solvable.
Michael: Yeah, it's kind of the whole Knevin model of complicated versus complexity.
Roger: It can only be managed because we had a recent article on the Kitcis blog, Kitcis.com, awesome resource for retirement and all things, about guardrails, which is one of those models that was trying to introduce some of this flexibility. When I think of retirement frameworks, we have safety first, we have Monte Carlo scenario probability, the CASTEC modeling, guardrails, and then the proverbial 4 percent rule that are trying to map out something that you really can't figure out.
It seems there's not really one way to do this from a retirement planning perspective.
Michael: Well, and I mean, to me, those are all like the same model, just on a scale of how much flexibility you have and want in the first place, right? Like I'm just going to buy annuities, it's guaranteed, cool. So, your willingness to have flexibility is zero.
Got it Right, like I mean for some people like I would be happy if today was the best day of my life as long as I can guarantee that no day will be worse than this so I will annuitize my wealth I will completely lock in everything it can never be better than this but it can never be worse than this and if I’m pretty happy where this is like great. Off I go on my merry way.
Then you get one further step up from that, like the sort of proverbial 4 percent rule frameworks, which are essentially, okay, I've not literally risk transferred this to guarantee it won't be worse than this, but it's literally never been worse than this at any point in history. Like about as much assurances as I can give out there with sort of the asterisk, like, okay, if World War III breaks out and destroys half of U. S. manufacturing capability, I cannot guarantee that your retirement is going to work.
There is some level of drastic, literally never seen before, exigent circumstances that could still come in and introduce some risk, and you decide if you're willing to tolerate that.
Then we start moving a little bit further out. We say, well, let's put some guardrails around this. Like, I'm willing to have some flexibility. I don't want a ton. Like I'd like guard rails right kind of literally like I want to put some bumpers on the bumper lanes here. But as long as it kind of stays in the bumper lane zone, I'm willing to accommodate that level of flexibility and then the medium then you got one step further out on the scale Which is sort of like an open-ended Monte Carlo framework around well, we're just going to do this thing.
You have to decide what probability of success you're willing to accept, which I actually have kind of railed for probably the better part of a decade now that we, we actually really need to stop calling it a probability of success because it's not what actually happens. Like it's not a success where the alternative is failure, at least.
For my career of, what am I, 24 years now, as an advisor, I've literally never seen a client fail. Like, they're spending and spending, enjoying their retirement, and one day they bank, wake up, and they're like, oh, shoot, apparently my bank balance is zero, and all my checks are bouncing. I didn't realize I literally ran out of money. That doesn't happen. What happens instead is if you're going down a problematic path, at some point, you're like, this isn't going well, and I'm sitting down as the advisor, and in our case with clients, and like we're saying, like, this is projecting in the, you know, steadily declining over time way that our planning projections are when someone is overspending relative to their wealth, they say, like, look, If you stay on this path for another 10 or 15 or 20 years, whoever it's going to be, you are going to run out of money.
Then someone says, well, I don't want to run out of money. What do I need to change to get this back on track? Then they make an adjustment. And the longer we wait, the more dramatic the adjustment has to be. There's a lot of parameters around what the adjustments are. But if you even just start reframing away from probability of success or probably impliedly probability of failure and you just start talking about probabilities of adjustment, which is really what they are. Like if you succeed, you don't have to make any changes, if you don't succeed you adjust.
Roger: Right, you recheck a compass over and over again to help orient.
Michael: Correct but relative to like a guardrails framework if you're literally just operating off of like probability of success and adjustment, it is in that compass style, like, well, I don't know what the adjustment's going to be. We're just going to hang out a few years from now and we'll see what it is when we're there.
I think of all those, like, it's the same scale. It's just a function of how much flexibility do you want or do you need or just are you comfortable with? This cemented for me very early in my career, we had a client that we were working with that were pretty significant wealth and they enjoyed it. They spent it, they had a quite high spending rate. This is back in the 2000s, but they were probably spending like six or 7 percent back then and had retired in their fifties. So fairly long-time horizon. By any traditional, you know, 4 percent rule, they're quite high, even by a Monte Carlo engine at the time. I want to say they were like a 60 or 70 percent probability of success. Our baseline back then was like, I basically want to see like 90 something, preferably 95 plus. Cause an advisor, I never want a client to run out of money on my watch. So, my brain's anchored at 95. We go into this meeting where they're like 60 something.
I'm like, this is from the advisor. This is one of those, like, I'm the bearer of bad news. Please don't shoot the messenger kinds of moments is what it feels from the advisor. Your spending is unrealistic. You're taking an immense amount of risk. There's a one in three chance that you're going to fail. Like the terror is a failure. We sit down with them and we start this conversation, right? You've got a 66 percent probability of success. His name was Chet. Chet says. So, you're telling me there's a two out of three chance we don't have to change anything. Yeah, it's a very like, glass half full way of looking at it, Chet. But like, yeah, there's a two in three chance that like, everything you're doing is fine and you'll even have money left over. He said, great, Lisa and I are going to keep doing the traveling that we do. If the one in three starts happening, call us and we'll come home. Because they were super world traveler types.
They're like, bad things happen, call us, we'll come home and change our lifestyle. Short of that, we're not going to choose to not enjoy the lifestyle that we have right now that you're telling us is a two in three chance we can do indefinitely because of a one in three possibility that we might have to cut it. If we have to cut it, call us when we need to cut it. We don't want to cut it now in anticipation of that. We'll adapt when the time comes.
On the scale of having worked with clients over the years, right? I've certainly had some that are at the other end of the extreme, like one iota of adjustments to my lifestyle is a personal catastrophe and crisis for me so like we dial them all the way down, like 4 percent rules. But Chet and Lisa to me still very much stick in my head because here they are sitting at these two and three probability successes. They're like, awesome. If we have to make changes, call us. Other than that, we're going to enjoy our life. But the last thing we possibly want to do is curtail the lifestyle we like in anticipation of a risk that you're telling us is two and three chance it won't even happen.
Roger: There are so many interesting things to unpack there. One is that they recognize that their spending is essentially a year-by-year decision, right? It's discretionary. This isn't base great life.
Michael: To be fair, it was very discretionary spending, right? If this was all their mortgage, I probably would have been a little more nervous about even like, you know, sort of blessing this approach.
They were very discretionary and we were all clear that like, there was a lot of discretionary spending in their budget.
Roger: They understood the agility they have, since that was my favorite word. The other part of it, I think, that comes into that from an advice delivery standpoint, Michael, that I was hearing is, and it's valid as the provider of the advice, are you okay or not?
One is we have some internal biases of we have compliance, we don't want to get sued. We have, I don't want to fail these people. I would hate to have that really, really bad conversation later on.
Michael: As a professional, like I do not want to have a client fail on my watch, right?
There's just sort of like a fundamental thing as a professional. Like I would kind of like my batting record to be a thousand here.
Roger: I think of these retirement frameworks. There are less things to implement in a rigid, scalable way, and there are more mental models to inform a more elegant process.
I think a lot of times, we think of guardrails as an example, and I know there's some active discussion going on in the post. In practice, they're not this box that we have to fit somebody's life into. They're just mental models to help us navigate with the client. I get very wary of these mental boxes that we put on a process. I would much rather have a client build a life from the inside out rather than fit into something that was created for them. It's a dance to do that.
Michael: Yes, I mean, I agree with, I guess, the caveat or asterisk that I would give is there is a certain level of certainty, comfort, and here's a box, the box has been pretty well tested, we're pretty darn certain that the box works, and if you're not sure what to do, like, here's a box, live in this box, and you should be able to kind of do what you want to do within the parameters of the box. A lot of people are, I find, like, are not only comfortable with that, kind of prefer it, right?
It reminds me in other contexts, you know, like, I had a friend who was so excited that he finally got to the point where he could build his own house. Like, the way he wanted it. He had, he had very particular views about what he liked to do and how he liked to live. He custom built his office. When he sold the business, he was like, I'm going to make the house that I always wanted. I'm so excited to build the house.
Then I talked to him a couple months later as he's in the building process and he's miserable. He's like, I just got like yesterday, my wife and I spent six hours looking at doorknobs, cupboard handles because when I build my own house from scratch, every stinking decision has to be made.
He's like, you know, in retrospect, I wish I'd worked with one of those custom builders that like gives you a couple of plans to choose from, and then I could pick things off the list. Like, I'm not going to do the prebuilt thing. I got some preferences, but he's like. I kind of wish I'd picked the midpoint where like, here's a list of five, like here's a list of five options for brasserie that matches your doorknobs and cupboard handles, and like three choices on cupboard types and three choices on wood types.
He's like, I could have mixed and matched and pretty much made what I wanted. But completely open flexibility is like this turned out to be a little bit more overwhelming than I expected. And that's not to knock a few people that literally like revel in those moments or like, you know, I love building my own cabin with my two hands.
Like if that's you more power to you, even to me, like that sort of a spectrum is of where we are as people. I think it's the same reason why we've kind of framed up this spectrum of retirement flexibility from, you know, I'm just going to ensure and transfer all the risk. I'm going to lock in exactly where I am. It won't be worse. It won't be better. I'm good with that. To people that are like Chet and Lisa that were like, yeah, we're just going to kind of look at the compass once a year and see where we are and if we got to reorient a little, we'll make the adjustment at the time.
In our professional world as advisors, we talk about things like risk tolerance because we need to make sure that portfolios and investment risk are aligned with your tolerance. I really think of that as just as almost in some ways, even a purer expression of risk tolerance is one thing when we talk about it in terms of the volatile of your portfolio and assets. You know, do you want to pursue a high, slightly higher return? If you might have more drawdowns and some of the. Technical language that we use in the investment context. But to me, like the purest, perhaps, aspect of it is how do you feel about spending a little bit more if there's a possibility you might have to tighten your belt in the future? How do you feel about spending a lot more with the possibility that you would have to really tighten your belt and possibly materially change your lifestyle?
Chet and Lisa were like about as far out on that spectrum as you can get. I've had other clients that are all the way over at the other end, right? Like any spending adjustments as a personal catastrophe. To me, like just, that's kind of an adjustment flexibility dial that we can adjust or if we're planning our own retirement there, I feel like there's sort of a know thyself moment.
Roger: That's definitely one of the revelations over the last ten years is the research on, you have to match the structure to the person to help give themselves permission from a psychological standpoint.
Michael: Correct. Correct. I feel compelled to acknowledge, living this across from clients, like, you and your significant other, who is their own wonderful human being that may be a little bit different than you? Because I see like a lot of challenges crops up because not all people have the same tolerance for risk and God bless like there's a lot of opposites attract out there across many dimensions, I find this is one as well.
Couples I often see have challenges with this because someone's like Chet and the spouse is at the other end of the spectrum, not to be gender based. I've seen it go both ways, but like one is at one end of the spectrum and the other is at the other end. That actually makes it very challenging for them to plan their collective requirement. Cause one's like, we got to lock all this in because I don't want anything bad to happen. The other one's like, we just adjust like we have all our lives, but I hate the adjustments, but we're great at the adjustments. Off the couple goes trying to figure out how to come to a compromise of what this should look like between the two of them.
Roger: The quote that comes to mind when I think of retirement planning, which has nothing to do with retirement planning is by Phil Stutz, which is "You're never going to be exonerated from uncertainty, pain, or the need to do work."
That is the human condition. When I think of. of a framework, guardrails, safety first, 4 percent rule. They are attempting to exonerate you from the need to adjust or uncertainty. It's a little bit of a loser's game because you're not going to solve for it, right? They can help manage it.
But the other part I want to weave into this, Michael, is I don't know if you've read Die with Zero by Bill Perkins.
Michael: Familiar with principle, haven't read the book.
Roger: In my experience, time is asymmetrical when you're getting older, early years are much more important than later years because it's all you got.
So, it's not like a 28-year-old who can wait 10 years. No big deal. Yeah. Time is asymmetrical and that's a very human condition of creating a great life, the pressure to do that. A lot of these frameworks If implemented, we'll essentially have us die with too much money assuming normal or reasonable outcomes.
That seems like a whole other issue. That is, people, I think the person experiencing it, that's where regret comes in. Oh man, I could have done all this other stuff. There's a balance there. How does that get weaved into whatever process or framework you're using?
Michael: I think about this in two levels about how we try to solve it.
In the purest sense, I would say I really can't. Not totally, I get the idea, right? Like, you know, the last check you raise to your undertaker and it bounces. Perfect planning, right? In the classic sense, I mean, we often joke in the advisor world, like, tell me the day you'll die and I'll make you the perfect retirement plan. If you can't answer mine, I can't answer yours.
I find it challenging in practice because, in the simplest sense, like, I don't know what your time horizon is, really, I don't know how long you're going to live, and yes, most of us have some preference to front load retirement, but not to the point of literal destitution at the back end, like, I would just like to have some level of comfort in my later years, should I have, like, the great misfortune of still be kicking along, so A, I don't know what your time horizon is, and B, I still have to deal with some version or expression of sequence of return risk of like, look, either I can literally take no sequence risk, but then I'm locking in a lifestyle that I can't move up or down, or I'm trying to do this mostly with fixed income. But then I got to build like a bond ladder over some time period and I'm at risk about living that time period.
There's really no practical way to solve this without at some point starting to introduce some growthier stuff called like equities or real estate or like something that has some volatility. The moment that I start putting in some stuff that has some volatility, I have to start dealing with the fact that there's a possibility that this could look worse in the future. If it could look worse enough in the future, I can't just like live high on the hog here, banking on future returns that might take a while to show up, and it turns out I've depleted too much while I was living high on the bad return period and I can't get the recovery, and I've got problems. There is just a natural phenomenon to me that I can only protect against this so much when I've got an uncertain time horizon and sequence of return risk. The things that solve for that end out leaving some dollars over in most scenarios, in basically all scenarios.
That being said, again, I don't like to view these as binary decisions. Like, you get two choices, go broke early or die with a ginormous pile of money left over because you underspent your whole lifetime because you were protecting unsecured return risk and uncertain longevity and the rest.
There is a midpoint to me, and the midpoint is where things like building with more flexibility start coming in. It is the, well, okay, you can live a little bit of a higher lifestyle right now and enjoy some of the things that you want to enjoy as long as you're ready to adjust if times don't go well.
If times do go well, you can live this lifestyle for 15 plus years. If things don't go well, I might have to call you in five or seven or 10 years to tell you it's time to rein it back in a little bit. Either way, like you're going to get a couple of years. But yeah, I'm not quite certain how long that's going to last because there is some probability of adjustments.
Not failure, but adjustment. There's some probability of adjustment. I don't know which path you're going to hit, right? If it's Chet and Lisa, I don't know if you're going to get the two thirds that works or the one third that doesn't. Life's going to tell you that. What I want to know, A, is are you ready to make the adjustments that it takes to do the one third?
B, like, where do you want to dial this in, right? I've had some clients who are like, I would like 95 percent chance that I don't have to change anything and like a 5 percent chance that I have to make a tweak. Chet and Lisa were comfortable with much wider parameters around that, which is basically like a version of guardrails.
Roger: I think actually it's the vast majority of people fundamentally acknowledge that changes have to happen by the time we get to retirement.
Michael: We've usually seen a wee bit of change over our lifetimes.
Roger: Yeah. From a planning perspective, I think of it as, you know, as planners, we try to plan out the long term.
If we say we're going to spend 30, 000 a year on travel for 20 years, well, we're planning that out. Well, Chet as an example, really, it's the yellow brick road where you're just building each brick as you go. Each year is a new decision depending on life.
Michael: Correct. The challenge that I've got, so going all the way back to the beginning discussion, basically like around planning software and a lot of the tools that are out there, what's difficult for me, even still as an advisor, is to really help people understand where those tradeoffs are.
Roger: Really?
Michael: Okay, so, if you take 30, 000 vacations, you're basically fine for 20 years. But if you want to make them 50, 000 vacations, you might have to cut this off in 10 years. If you want to make them a hundred thousand dollars, super mega cruises that are fricking awesome and everything's luxury and amazing.
Great. But there's a one in three chance you're going to have to sell your second home in three years.
Now you can tell me where you want to be on the spectrum of 20 good vacations, 10 great vacations, or live freaking amazing luxury and have a one in three chance of, of needing to sell your second home. Again, we'll all have our own preferences about where we are on that spectrum of the risk. My challenge though, is It's really hard to actually explain to people, kind of the parameters of that game, how much you can live high now and how drastic that change might need to be later. I just find the planning tools are not very good.
It's sort of the, if this then that, kinds of sequences.
Roger: But they are good in that if you have a baseline of, okay, we're spending 15, 000 a year for 20 years. Then when you're having that annual meeting before the next year, but I want to spend 50 next year. That's very easy to put in to see, okay, if we do this extraordinary thing.
Michael: Well, correct. But if I just reorient every year, then cool. Sometime in my mid-seventies, like, oh my Lord, you can spend so much money right now because none of the bad things have happened and you've got a lot of money left over. It's like, cool. But if I had known this, I would have done this in my sixties.
I wish you told me that I could have spent more in my sixties because there was a four and five chance. I could enjoy all of that. The worst-case scenario is I would have to trim a little bit in a way that I would have been totally fine trimming if you just told me I can have every extra vacation I want. All I have to do is be willing to do really basic vacations and maybe dial up, dial back the cabin at the lake. I would have made that choice if someone had told me, but it's really hard to frame up those choices just with the tools that we have today. We're not good at filling the tradeoffs.
Roger: You frame it up each year by year. Cause every year you're figuring out what you're going to do the next year anyway.
Michael: Yes. But then I get the regret of all that tells me is I could have spent more in the past.
Roger: No, I don't think it does because if you have good sequences, let's call it, then each year you can explore what you can do to increase that one off.
Michael: Yes, but I don't spend the good sequence until it happens because it has to happen for me to say. Oh, it's going well I'm going to spend a little more. Oh, it's going well. I'm going to spend a little more Oh, it's going well I'm going to spend a little more like in Chet and Lisa's case if I did that I would have told them that you need to cut the darn vacations right now because you are way too high risk and if your account balance starts doing better, I will turn on your vacations for you when you are not taking such a risky strategy. Their version was we are deliberately going to spend more than anybody else wants to spend because two thirds of the time the markets will save us from this potential catastrophe. The other one third of the time, we will take draconian cuts to our lifestyle to enjoy what we want to enjoy today.
To me, like, the challenge when we just go year by year, in essence, we still can't choose up front to take the risk. Now, granted, not everybody wants to take the risk. Chet and Lisa are like my quintessential example because they really did. Like, that was a real client scenario and how it played out for them. But the whole nature of their path was, we are going to spend more than you would tell us to spend every year. We are prepared for a one in three possibility that you will tell us to cut more than anybody would ever tell us to cut in a year because they were willing to live greater extremes and take greater risk up front. They were just really tolerant of the spending flexibility.
Roger: Spending more up front with the idea of you just have to reassess, just like you would reassess with a compass each year.
Here's a question, Michael, that what I'm hearing and you tell me if I'm wrong is these mental models, whether it's safety first or Monte Carlo guardrails, we have to have some basis for how we forecast long term because we don't know how long someone's going to live. Ultimately with chat or with anyone it's a decision that has to be made, and it's ultimately, literally going to be a judgment call because we never have certainty in almost every decision, especially with retirement.
Michael: As I view it, it's an expression of risk tolerance, and we'll pick different points along the curve of just how much uncertainty we're willing to tolerate, right?
If you're not willing to tolerate anything, great! Spend 2 percent of your money every year. I will never call you about a cut and at some point, we'll sit down and say, Oh, it turns out you're a multi bajillionaire. What charity would you like to make very happy? So that's still a reorienting every year kind of thing, but I can put you so low that practically speaking, we will be every year to adjust. I guarantee you as much as I can ever use the word because you know, that's very frowned upon in our world. Like, right. As much as I can ever use the word I can guarantee, that every year we sit down, the only question will be are you going to spend more, a lot more, a lot, a lot more, or just start donating money because there's too much?
Roger: Right, I think I have issue with that is I don't like the phrase it's an evaluation of risk tolerance because I think that comes from an investment mindset, and it's much more multidimensional there. But ultimately, if you're going to get to a judgment call, regardless of whether it's your evaluating risk tolerance or you're doing life tradeoffs, because this is not a math problem that math is real, but this is not a math problem in terms of the human side.
As retirement planners, we think a lot about a lot of what we talked about. What I see very little research on externally, and I would love to, and I think people do it, but given that this is unknowable and not solvable, and it's going to cause a lot of adjustments, really what we ended up becoming our decision-making partners, right, to help organize the decision.
I see little, if any training on how do you make decisions? What's an organized way for making decisions, whether it's the OODA loop or some other framework, because ultimately that's more important than whatever the investment portfolio is or Monte Carlo.
Michael: Well, and to me, one of the interesting pieces that's starting to crop up, even our financial advisor domain, you know, we spent the better part of the past 10 years talking about what the industry likes to call behavioral finance, which is essentially the research into all the quote unquote irrational ways that we make investment decisions and take investment actions, which arguably aren't really irrational, but they're based on heuristics that our brain uses to try to get through the day. Because if you actually like logically sat down to make every decision all day long, it'd be exhausting. You'd still be sitting in your bedroom trying to figure the left sock or the right sock on first.
Most of humanity, like we get through most of the day with some heuristic shortcuts that gets us through the day. Very, very helpful for survival, not great when accidentally we apply it to an investment domain that it was not really built for, but a lot of that research has really been around like, okay, we've done all these studies know all the ways these heuristics show up and the ways that they map on to sometimes less than ideal investment decisions. Doesn't tell us what to do about it.
When you get in, like, what do you do about it? Right from the advisor and like, cool. I understand my client holds more company stock than they probably should because of a combination of the familiarity bias and the overconfidence bias. I'm like, so am I supposed to say to the client? Well, Mr. Smith, you realize you hold way more company stock than you should. I've read about this in a book. It's because you have an extreme overconfidence bias coupled with a familiarity bias. That's making you act irrationally.
I've never actually tried that in a conversation with a client. I'm fairly certain how not well it's going to go.
When you get to this question, like, well, okay, how do we help clients actually make better decisions? To me, what's really interesting cropping up from the advisor realm is we basically stopped looking to the economists for answers, which is where all the behavioral finance research comes from. What we're getting into is the psychology of decision making and how people make decisions and how we help people make better decisions or work through the decisions better or better consider options. There's lots of cool research there. I feel like it's just barely starting to show up in our domain as advisors or like in the retirement context more broadly.
Roger: Whether it's the concentrated position or we want to buy a lake house, should we? Which is much more nuanced outside the investment portfolio.
One of the things that I've realized, or this is the, again, I get my own feedback loops with the listeners of the show and Rock Retirement Club, almost all of them struggle to find a capable retirement planner at least to the bar that I talk about or other people talk about. I always struggling to live into that as well.
What should be table stakes for a retirement planner? What should be the things that they expect them to deliver?
Michael: So, table stakes in terms of like, services.
Roger: If you're going to hire a retirement planner, what topics and things should they deliver to you?
Michael: So, for most folks, there's some layer that is, I'll call it the bread-and-butter table stakes, which is, there's some retirement assets you need some guidance and advice on. I mean, most of us have some kind of, wealth-based retirement. There's now a proliferation of models in our industry. So maybe you give them the dollars to that manage. Maybe they advise you on it and you still do it yourself. Maybe they're just giving you some high-level guidance and you're mostly steering yourself.
Like I need some kind of guidance about whether the wealth is put in a reasonable place to create the cash flows and the sustainability that I need.
Can I retire? Can I afford to retire? To me, that's even the second. The first is like, if I am retiring, will the money be handled in a way that it's not just going to implode itself between here and retirement?
The second part, I think, is some layer of expertise in being able to answer this question around, can I retire? Can I afford to retire? Do I have enough? What kinds of tradeoffs would I be looking at if I do retirement? Like, how am I supposed to proceed down this path, right? Do they have enough experience and background to just like, be able to do the analytical component of figuring that out?
The third to me is, there are then kind of a suite of additional technical knowledge domains that I think of as, as layering into this, it's advice about social security. It's advice about Medicare. It's advice about how am I drawing down retirement assets in a tax efficient manner? I can create or destroy a lot of incremental wealth and retirement sustainability just with the tax efficiency of what I'm doing. That's which sequencing my withdrawals from and which assets go in which accounts, which we call the asset location piece in the research end. Kind of this layer of technical knowledge about how I can quantitatively improve this path.
The fourth dimension to me is ultimately much more, I was going to say like conversational, that's not the right label for it, but being able to talk through and help you figure out what you actually want retirement to look like, like what those goals really are.
Roger: Coaching aspect of it.
Michael: Yes. Most people I talk to over the years, you know, like, tell me about your retirement goals. Well, you know, I want to retire at 65 with a million dollars. Like, cool, like, neato, can totally help you get there. Like, just curious, like, why a million dollars? I mean, like, that's a remarkably round, precise number. Like, did you actually go through some calculations and figure it out? It takes 1. 00 million dollars? Well, no, it's just kind of a number. Like, well, cool. If I could show you how to make your retirement goals work with 800, 000, would that be better? Like, sure. Then we'd be there sooner. Great. Okay.
So, it's really not 1 million at 65. It's like 800, 000. Well, If I could show you how to layer on some consulting back into your prior industry, because it seems like you really enjoy the work that you do and maybe you would still want to be attached and if we did like three to five years of consulting at just a quarter of your prior rate, it makes a big dent in your withdrawals. You could probably actually retire at like 62 instead. Would that be better?
It's like, well, well, yeah, that'd be even better. Like then I can do some of the other travel and things I want to do sooner. We start going down this road and all of a sudden, the span of like a 10 minute conversation, I've changed your retirement age by three, five, seven years. You're in need of retirement wealth by hundreds of thousands or millions of dollars sometimes for clients with larger numbers. That's just a conversation into, as I think in the purest sense, like just, helping us figure out what our goals really are, because most of us have never really spent a lot of time trying to crystallize what those goals are.
We kind of, you know, 65 is the popular number for retirement and a million dollars seems like a nice round number. I take what the world tells me is a reasonable goal and I make it my goal instead of actually figuring out my goal, because there's sometimes kind of messy personal discovery stuff that goes on in figuring out, like, are you retiring from something? Are you retiring to something? What do you want that to look like? What is your significant other think about that? What are your shared goals? Have you ever had some of those conversations? To me, like, that's some really meaty, weighty stuff about retirement. Not only because I can quite materially change all the mathematics of your retirement affordability when I do all the other number crunchy stuff, but also simply because when a lot of people kind of plow in a retirement without that clarity They don't actually end up enjoying retirement very much, right? Retirement is also when suicide spikes, when divorce spikes, when depression spikes. There's a lot of negative stuff that shows up there as well. Not that I am trying to paint retirement as bad, you have to work until the day you die.
To me, it much more comes from there are people that retire with some level of intentionality into what they want that life to look like after work, and others don't. They go there by force, by circumstance, by exigence, events that drive them there. Or they just kind of plowed towards it because they pulled some external numbers and goals that seemed reasonable and do it and then get there and kind of have the proverbial dog caught the car moment of, well, now I don't know what to do with myself and my life and my time when I wake up every day. Golf sounded cool until I played with the same foursome 17 times in the past month. I'm getting a little bit tired of them because Bob has the same jokes. Every time we do the round of golf and I have 29 years of this left going, oh my gosh, what have I done? Which is why we see the rise in gray entrepreneurship and a lot of other things that come from the fact that I think a lot of us kind of fly into retirement too fast without a lot of intentionality.
Relative to your question of like, what am I looking for in a retirement planner? I mean, it's also someone that can help me have those conversations and try to drill down a little further into no, but like, really, what are your goals? Like, what actually would make retirement fulfilling for you and your spouse?
Roger: Do you have time for one more question?
Michael: Yes.
Roger: Given that we have brokers, we have advisors, we have hybrids, we have insurance salesmen, we have whatever other categories are out there.
Michael: Yes.
Roger: All of them, to some degree, that serve our target, the retirement market says the same things on the surface. A lot of the things that I agree with you on, how does someone listening actually navigate to find a safe place where not only do they have a good heart and are safe, but actually have competency to do this?
That's difficult. I don't know if you have any thoughts from all of your discussions with various firms.
Michael: Yeah. So, I look at this at a couple of layers, right?
To me, first and foremost, kind of like incentives and accountability matter. Like making sure we're working with someone that's actually in the advice business and not the product sales and distribution business, making sure someone who's compensation is actually aligned to where we're trying to go, right? They want to be with us for the long run. They're incentivized to give ongoing client service and not just find the next client to sell something to practically from our industry perspective that essentially leads you down the road of fee only, by and large, in our industry, that's sort of the technical labels for it.
In the purest sense, I always start with like, you know, incentives and accountability matter first and foremost, right? If not that I hope anybody gets into trouble, but like, if you can sue someone out of oblivion for giving you bad advice, they tend to be more incentivized to give you good advice. Huge swaths of our industry, that's actually not the case. Like as long as you sign the documents that said you read the disclosures, then the sale was not unsuitable for you, which is sort of an egregiously low bar. You really don't actually have any legal accountability to them.
I start there. Then I go to education matters because our industry kind of an embarrassingly low bar for education.
Like you don't actually have to know anything about finance or advice to be a financial advisor. Just that's not anywhere in our regulatory requirements. Very sad but true. So, education matters and it's all voluntary. Which means you're looking for voluntary designations that advisors have invested into themselves. So, CFP® certification is usually the baseline for most consumers these days. If we're going deeper in the retirement realm, I'm looking for retirement specialization designations. So, RICP and RMA are kind of the big two in the industry right now.
The third thing I look for is expertise. So, it's one thing to have the education. It's another to actually have practical experience doing it.
I'd be asking the, the prospective advisor, what are your typical clients? Basically, I'm trying to figure out like, are your typical clients like me? Similar age, similar circumstances, similar wealth and financial means, right? For better or worse, like, you know, retirement advice does look a little bit different depending on our overall financial wherewithal so you want an advisor that knows how to navigate the conversations that crop up with your levels of complexity and the dynamics that are present for you.
Incentives, accountability matter, which steers you towards be only RIAs. Education matters, which steers you towards CFP® certificates, ideally with an RACP or RMA after it. Expertise matters, which means do they really work with retirees like you as the bulk of their clientele, so that they're really putting in the proverbial reps to understand what you do.
Then to me, like, the big fourth is just communication matters. Like, you have to be able to talk to them about money stuff, that for a lot of us is very personal and hard to talk about. You have to be able to talk to them about money stuff, and be comfortable having that conversation, which is why even like when I give recommendations to people around specific advisors, I encourage them like you got to talk to two or three. I wish I could save you the time and just give you like the one but even two great advisors that like check all the aforementioned boxes. We just have different communication styles. We just have a different nature of rapport and how we connect. If their communication style does not jive with your communication style, this isn't going to work if even everything else lines up. You've got to talk to more than one, realistically, and even from the science of decision making, we make better decisions when we compare A versus B than A or not A, so having two to compare to always helps you make better decisions. You've got to talk to more than one and just see if the communication aligns.
Roger: One thing I would add in there is to explore what exactly is their process for device and asking the questions behind the questions. Because almost every advisor firm has a diagram of a process. But that's the question behind, well, how does that actually work? Tell me exactly how these meetings work. Because process trumps if you're managing uncertain environments. You want a checklist on airplanes.
Michael: Fully agree. I would, from my firm, I kind of tucked that into the expertise sandwich. It's like, have you done this long enough that you actually have a process that you take people through that you can explain and articulate and show it works and make me confident that it's going to work?
If I've really never done this before, because I have lots of clients all over the place, I usually don't really have much of a process. I'm just like, yeah, we meet and I give you suggestions, recommendations versus like, no we've got a process, we do this, we take you through these conversations, we do these analyses, we meet with you on this cadence, here's the things that we cover when we're going through those meetings, right, they can articulate a process, then I start to have confidence, like, oh, so you actually have expertise in this, like, you really do this for a living with people like me.
Roger: Thanks for hanging out with me and having this conversation about the state of retirement planning. I just came back from the shift conference.
Michael: Yes.
Roger: More on the human side. Fantastic conference. I came away from that more encouraged about the future of advice. Honored to know you, buddy.
Michael: Thank you. Very cool. Likewise. Congratulations on 10 years.
TODAY’S SMART SPRINT SEGMENT
Roger: On your marks, get set,
and we're off to set a little baby step that you can take in the next seven days to not just rock retirement, but rock life.
All right. In the next seven days, I want you to begin to evaluate the quality of. Your process for making decisions in retirement. Now, if you're working with an advisor, I want you to understand exactly what their process is and their communication schedule is and their incentives so you can evaluate and look for holes that you can lead to deeper discussions with them. Because if you're working with a planner, you are paying a fee of some sort and you want to make sure you get the value of that and that's going to make them better as well.
Now, if you are doing this on your own, Then I want you to evaluate the state of your process. How thought out is it? Where are there holes so you can make little adjustments to improve that process? Don't let what is be the enemy of what should be.
CONCLUSION
I came away from reading the couple thousand comments in the poll very humbled and inspired about what this show can be and what it should be. All the constructive criticism, all the encouragement, all the thank you notes. Wow.
We have an amazing group of people, including you that listened to the show that are really trying to do, create a great life and using retirement planning rather than just focusing on retirement planning.
I'm really excited to focus on this show to make it more focused to only bring on people that we think actually have something valuable to offer to you, regardless of how popular they are and whether they have a book out or not. We're more focused on not talking to you things just to try to sell you something, whether it's somebody else's product.
Now we're always going to talk about the Rock Retirement Club when we have open enrollment. Yes, there's a cost to that and we'll acknowledge that potential conflict of interest, but we think it's pretty incredible to help you create your retirement plan of record. If you're doing this on your own or you want to be a better planner or better consumer of retirement advice, we'll talk about that, but we're going to be upfront about it and it's honest about it.
I'm going to continue to use personally as my mastery journey and hopefully Help you master the art of retirement so you can rock retirement.
The opinions voiced in this podcast are for general information only, and not intended to provide specific advice or recommendations for any individual. All performance references, historical and does not guarantee future results. All indices are unmanaged and cannot be invested in directly. Make sure you consult your legal tax or financial advisor before making any decisions.