The clients’ spending is then determined by their asset allocation, portfolio amount and the degree of their original portfolio they wish to preserve. Every five years we start over, because the client is five years older and his or her portfolio has changed. We don’t allow a spending drop of more than 5% (and that is frozen for three years) unless a client younger than 85 is spending more than 10% of his or her portfolio—in which case another drop would occur. But the result of this is that clients can spend more earlier. This is not the right approach—it is an approach we believe in and are comfortable with. Give up on the right approach—there isn’t one.
When markets are volatile, behavior changes—our behavior and our clients’ behavior. Situations are impermanent; they are always moving. Using a strategy that locks things up through a flat payout rate may allow us to avoid the pay cut discussion, but it doesn’t reflect what happens in complex adaptive systems. We change, clients change, markets change, wants and desires change.
There are many ways to handle the spending policy discussion. What’s most important to understand is that how you handle it may be based more on your own fears than those of your client.
Ross Levin, CFP, is founding principal and president of Accredited Investors Inc. in Edina, Minn. Long an industry leader, he has served as chairman of the International Association for Financial Planning.
Whose Risk Is It Anyway?
November 3, 2014
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Comments
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Thank you, Ross, for sharing these stories. Thank you also for sharing so many details of how you handle these real world situations. I own/manage a small firm (200 households/$140 million AUM) and have also had to work through many of these kinds of challenges. (Real world is always so different than the academic studies!) Your article is an encouragement to me, as it confirms much of what we've been doing. Thank you for being a beacon for our profession.
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This may work fine in the laboratory or on the computer, but it ignores the one guaranteed and mandatory expense in retirement - Medicare! If you earn too much of the wrong type of income your modified adjusted gross income (MAGI) rises. Rising MAGI could mean you pay more for Medicare premiums because surcharges are based on MAGI. Pay more for Medicare, and you get less or zero Social Security. That means you have to come up with more net after tax income to replace SS. That could cause higher taxes and further principal reductions. Good luck trying to recover that in an unknown market.