Gabe Fransen | December 15, 2021

Does following the 4% rule provide for a successful Retirement Income Plan? With inflation, market fluctuations and the plethora of other variables in life, one could argue that having a customized, detailed, and well-thought-out income plan would be a wise decision – it’s just the rest of your life that we are talking about here.

If you are not familiar with the 4% rule, a google search will tell you all you need to know and you will quickly realize that the 4% rule was never meant to be and never could be a one-size fits all solution. Unfortunately, many folks will fall back on its simplicity and hope that it works for their situation.

Granted, today’s financial environment does require additional scrutiny as bonds previously yielding 4-5% are now closer to 1.5% and after factoring in inflation it drops below zero. Leaving money in a savings or checking account will lose even more purchasing power earning zero point zero, zero, nothing.

Without guaranteed returns that will keep up with inflation along with all the other variables in the market, many folks are increasingly favoring a more customized and flexible income plan as a part of their strategy as they are understanding the importance of the entire plan from income to assets to spending patterns and the unexpected.

Retirement Income Planning should include spending the time to get into the details of the household’s entire income outlook, from social security to Lifetime Income Benefits from an annuity or a Pension, to longer life expectancies and higher rate of inflation for healthcare needs and market volatility or the unfortunate possibility of a Long-Term Care or Assisted Living need for a family member.

With all the moving parts that we look at with our clients and prospective clients, it would certainly be easier to just “Keep it Simple”, but would that be in the best interest of our clients? Nope. We could run a projection of expected returns and tell them to only spend 4% of their investment portfolio and wish them well, but would that be in the best interest of our clients? Nope.

For an advisor to do what is in the best interest of a client that is seeking financial advice or investment advice, I don’t believe it is possible to give thoughtful recommendations without considering all the necessary data and all the variables that come into play for a given situation. The number of calculations and comparisons of different scenarios and options that are at our disposal are best handled by the power of a financial planning tool that helps us keep the data in place, calculate where it needs to be calculated and display it in a meaningful manner.

We have a 5-Step Process that allows for a consistent and smooth process while producing a customized and detailed plan for our clients:

Discovery

The first step in a good plan is identifying the situation’s variables. We do this through a process that we call “Discovery”. In this process we collect, organize, and input the following information into our planning software.

Your Income

Your income includes your retirement income sources. Retirement income for example would be your Social Security, pension if you’re fortunate to have one, and any other source of continuous lifetime income you have to your name. Strategies to get the highest benefits you are entitled to should be examined and considered.

Your Assets

Your retirement assets on the other hand include accounts like employer sponsored defined contribution plans (401(k)s, for example) individual retirement arrangements (IRAs), non-qualified brokerage accounts, and other personal savings. These accounts should be strategically harvested to supplement your retirement income and compliment your retirement income sources. We believe that every dollar has a specific purpose and timeline, this purpose and timeline for the dollar allows us to help identify how risk-averse we should be with that dollar.

• Potential Return: Assets that need to be spent in the near term can be allocated to an investment vehicle that has less risk, but still has liquidity while other assets in the portfolio that have some time horizon on their side can be invested in a vehicle with more upside potential. Having the proper balance based on inflation adjusted spending needs allows the plan to fully utilize the assets available.
• Taxation: Assets have a specific tax classification that will impact when they can, should and will be used through the income plan. Based on current and future tax legislation, this will be a fluid part of the plan.

Your Expenses

Most folks that we talk to in our office haven’t requested a reduce lifestyle in their post working years compared to their working years, to the contrary, most people that we see talk about vacationing and “getting out of here for the winter” and doing all the things that they wanted to do but didn’t have time to do during their working years. We help identify what the retirement needs, and lifestyle goals are and build a plan to allow for that.

• Often overlooked, but extremely important is to consider inflation adjusted spending
• Consider ending certain expenditures over time

These details are crucial in identifying the income needs throughout all the post working years.

Analysis

Step two in the process is to Analyze all the information collected during discovery. This is the behind the scenes work that we do that allows us to come up with different recommendations. Below are some, but not all the things we consider during our analysis of the situations:

• Income
  • Social Security Timing for maximized or optimized income of social security income for the household
  • Pension Options selection
    • Lifetime income – with or without survivor benefit
    • Lump Sum
  • Desired Retirement Age
  • Part time work
  • Passive income
• Assets
  • Asset Tax Classification
  • Asset Investment Vehicle  
    • Fees and Expenses Associated
  • Asset Risk Allocation
  • Asset Rate of Return
  • Asset Withdrawal Order
• Expenses
  • Expense Inflation Rate
  • Expense Wind down plan
  • Expense End Date
  • Expense Return on Investment
• Cash Flows
  • Future contributions to asset portfolio
  • Future reductions to the asset portfolio
  • Roth Conversion
  • Planned Expenditures outside the spending plan
• Taxation
  • Annual Tax Bracket Optimization
  • Future RMD Consideration
  • Qualified Charitable Donations
  • Donor Advised Fund

Recommendations & Implementation

Identifying areas of risk and being able to recommend an action plan to mitigate the risk is critical to the plan – identifying the issue without addressing it doesn’t provide the type of value that we want to provide to our clients.

With all the data gathered, organized and analyzed, we can identify cracks in the plan. Where we can eliminate the cracks, we will do so, some cracks will be mitigated and other future cracks like tax law changes, we have no control over, we’ll manage around those the best we can. The detailed and thoughtful approach that we take to go through this process of discovery and analysis puts us in the best position to provide the most value to our clients. Once we have everything in place and we talk through the recommended actions – we find the most cost-effective way to implement the solutions. 

Review

A well-managed plan is reviewed on a regular basis. We prefer at least an annual review to get caught up with life changes to make sure the plan is holding up to the situation, which is ever changing. If there is a life change that creates a crack in the plan, we’ll have caught it soon enough to address it. Even though annual reviews will most likely be frequent enough, we are happy to meet with clients at any time there is a life change or a financial decision to be considered.

The 4% plan might work for some, but we are able to provide the most value to our clients if we follow our holistic planning process from discovery to annual reviews.