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Several years ago, William Sharpe was discussing spending in retirement.  He concluded creating sustainable income in retirement was the “Nastiest, Hardest Problem” in retirement1.  This is especially noteworthy because William Sharpe is a Nobel Prize-winning Stanford University Professor who has spent his career working through complex problems in finance.  Let’s face it. When a Nobel Prize-winning economist says that something is hard to figure out, he’s probably right.  This can leave an average investor wondering where to turn or how to solve this perplexing problem.  It would be normal for any retiree to ask, “Am I going to be able to create sustainable income for myself and my spouse in retirement”?  To answer these questions, we’ve created a framework called the Retirement Check-Up.

The framework includes four parts:

Determine Income Needs

An investor will work to determine how much they will need for a lifetime of security by defining essential living expenses.  We start by simply asking about current expenses that are considered essential.  Items such as food, shelter, and clothing will be necessary throughout the lives of a couple.  By establishing today’s costs and anticipated changes in future behavior, we can establish the current cost of future needs.  Once the essential needs have been calculated, we work to determine what discretionary spending may be a part of the retiree’s plans.  We then help the retiree establish any sort of legacy goals that they may have.

Identify Risks

Every investor faces certain risks, but each of these risks may affect investors differently.  The important first step is to simply identify the risks that investors face to address these risks effectively.  Investors face longevity and mortality risk even before they retire.  However, once a person retires, these risks can look very different.  In retirement for instance, an investor may fear outliving their money which was never a problem during their working years.

Similarly, market risk affects investors during both the accumulation and spending stages of their lives.  However, different strategies may need to be employed to address these risks during these unique stages of life. Health and event risks need to be addressed to ensure that every investor has the proper amount of liquidity available based on insurance elections and decisions.  Finally, ensuring that an investor is properly allocated across different investment vehicles allows them to address tax and policy risk.

Income Matching

Every year of life in retirement may look different than the year that preceded or followed it.  Not only will an investor’s expenses change as they age, but the sources of income used to pay for those expenses may also change.  Using this framework will allow the investor to maximize their after-tax income by integrating multiple decisions.  For instance, the decision on when to claim social security may impact asset allocation and insurance decisions.  Similarly, traveling (and spending more) early in retirement may affect investment allocations.  By combining an assessment of pensions and annuities with an evaluation of personal spending policies, home equity, investment portfolios, and insurance needs, the investor is better able to make holistic decisions.

Ongoing, Integrated Advice

Even the best laid plans need to be reevaluated and adjusted.  The framework that we have created allows for investors to walk confidently into and through retirement.  As investors age and experience the birth of grandchildren or the loss of a spouse, we know that their goals and needs will change.  The Retirement Check-Up framework we developed for our clients is designed to balance security and peace of mind with flexibility.  This will allow investors to age without fear, knowing that they are optimally positioned for inevitable change.

William Sharpe was right when he described this as a complex problem.  In fact, in an article published in Barron’s, he was asked, “Is this something people can do on their own?”  He replied, “I don’t think so.  Maybe if you were a physicist, but most people have a really hard time with uncertainty.”1  If you find yourself facing these problems alone, then maybe it’s time to reach out to a financial professional to walk you through a Retirement Check-Up.

¹https://www.barrons.com/articles/tax-loss-selling-upside-stocks-51635537082

Michael French

Author: Michael French, Senior Vice President of Investments