One thing all this suggests to me is that the quest to determine a universal safe rate is interesting and has value but may not be critical for a lot of clients. I suspect getting more clarity on what each particular client’s adaptation plan should look like is a more powerful exercise.
Instead of saying that the Monte Carlo simulation gives them a 10 percent chance of failure, I think it is more accurate to say they have a 10 percent probability that they will need to change something from what is illustrated. The conversation should be about what exactly those changes could be and when they would be instituted.
I have yet to meet anyone who doesn’t feel some negative feelings during bear markets. They are lousy for everyone. However, I have seen how those that had a plan to adapt to bad markets were able to keep control of their finances until the bear stopped growling.
For those that are about to retire, we spend some time looking at what they plan to spend their money on and how that would change when (not if) markets are bad. For those saving for retirement many years in the future, we want them to understand that how much they need to accumulate is affected by the nature of their spending. If they retire with many committed expenses and few discretionary, they have less flexibility and should accumulate more all things being equal.
Retirement can be scary and we shouldn’t sugar coat it. The next 30 years could be awful. By educating clients about what they can do in adverse situations, they may still feel anxious, but they can also feel empowered and are more likely to make sound decisions when the time comes. So, by all means, take the safe withdrawal rate studies seriously, but please, try not to use the results in a way that adds to your client’s angst about one of the biggest decisions of their lives.
Dan Moisand, CFP® has been featured as one of America’s top independent financial advisors by Financial Planning, Financial Advisor, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager, and Worth magazines. He practices in Melbourne, Fla. You can reach him at www.moisandfitzgerald.com.