transcript
Speech-to-text transcription can look a little quirky. Please excuse any grammar or spelling errors.
Episode #501 - Historical Vs. Projected Returns?
Roger: "It's tough to make predictions, especially about the future."
-Yogi Berra.
Welcome to the Retirement Answer Man show.
My name is Roger Whitney. I am your host, and this show is dedicated to helping you not just survive retirement but have the confidence to build that confidence because you're doing the work to lean in and really rock retirement.
Today, we're going to do a little bit of a deep dive on a listener question regarding what assumptions to use for the markets and interest rates and inflation, etc. Should you just use historical data, or should you use forecasted returns? There are lots of economists out there that do very thoughtful forecasting of returns. I have a pretty firm opinion on this, and a listener took issue with it in a very articulate, productive way. So, we're going to dive into that.
So why don't we just get started and answer your questions and work on Rocking Retirement?
LISTENER QUESTIONS
Let's get to your questions. If you have a question for the show, go to askroger.me. You can type in a question; you can leave an audio question and I'll do my best to answer it on the show to help you specifically take a little baby step towards rocking retirement. So, our first question today is the title question of do we use historical or forecasted market assumptions in our retirement planning?
We're going to dive deep into this question. We're going to get our geek hats on for you non geeks. I'm going to lead with my conclusion and then you can fast forward to the next question, or you can hang out with us and think through this in an organized way.
This is going to be an optimization question of how we make our retirement planning a little bit better. It's not resilience or feasibility.
So, Howard asked the question, it's like a three-minute question, but he does a beautiful job of asking the question and giving context around the question. So, I'm going to play his question in entirety, and then we're going to try to unpack this.
Howard: Hi, Roger. Thanks for all you do for us soon to be retirees.
I will likely be transitioning in the coming six to 24 months. I found your excellent podcast towards the end of last year, and I've listened to about 75% of your almost 500 podcasts now and joined the RRC in May and slowly coming up to speed.
In listening to several of your podcasts. I heard you strictly use historical data to estimate future market returns since these are known and do not consider economic models and forecasts since they are unknown to help guide retirement plans for portfolio returns and withdrawal strategies to meet retirement expenses.
I have some concerns about this approach. If one thinks the forecast future data may be different than the past, it seems to make sense to me to at least consider it, perhaps as a sensitivity analysis. Planning a road trip, we don't look at historical maps, we use GPS. We don't look at past weather for an upcoming weekend excursion, we look at weather forecasts.
Certainly, historical information is important, but if things going forward are likely to be different than the past, why ignore that information? If we just used historical data, we would expect the Yankees to win the World Series, the Celtics to be NBA champs, and the Canadians would win the Stanley Cup.
To be more specific, using S& P data back a hundred years was when the U. S. was just becoming a world power economically, and its population was growing exponentially and expanding technologically. Now the U. S. is already leading the world economy, but there is much more competition in population and market growth elsewhere.
Would we use the past 30 years of performance data for Apple or 10 years of Tesla to plan their future performance returns? I believe Wade Fowle looked at markets in 30 countries and found only the U. S. and Canada would have supported the 4% rule over the past 100 years. Why wouldn't the U S economy going forward be more like the majority of the other 28 mature economies with increasing debt, more competitive, global competitors, more limited population growth and immigration concerns, why not adjust historical data for current conditions?
Vanguard economists indicated that US stocks will rise 4. 7 to 6. 7% annually over the next 10 years, rather than the past annualized 9. 3% going back to 1928. If smart, educated economists see growth of the S& P 500 being about 6% for the next decade, why not incorporate that in retirees plans, rather than using the 9 to 10% based on the past 100 years data?
Basically, why drive forward looking in the rearview mirror?
Thank you.
Roger: Wow. What a wonderful question. I've listened to this question numerous times, Howard. Thank you so much.
All right. So, let's lead with the conclusion of the book on my part anyway. I don't really have a strong opinion as to whether you use historical forecasts or you use historical data or forward-looking forecasts for your capital market assumptions or your return assumptions, et cetera.
So, Howard, I don't really have a strong opinion one way or the other. I will give a caveat, a few caveats though. If you used forecast returns in your modeling, make sure you're super consistent, meaning that you choose a data source, that you believe in their methodology or their smartness, that they're consistent in how they execute that methodology and publishing those returns, and that you have some degree of confidence that they're right.
All right, that's number one. Pick that data source thoughtfully.
Number two is, rarely, if ever, change that data source. Meaning, let's assume you mentioned Vanguard. If you choose Vanguard and they have a 6% equity return, you put that into your model. Two years from now, when Vanguard comes out with their market forecasts, and you read somebody else's market forecast and say, Ooh, I like how they're doing it over there.
That makes sense to me. It's not new. I've been doing that one. This one sort of makes sense to me. I like what they're saying. So, you switch that data source and you use this new market forecast, and then a year or two later, you see somebody else. Oh, that lady. Really has it going on. She's using AI now and her forecasts seem much more intuitive. I'm going to switch to hers.
If you go down that road, you really don't have a process at all. It's just whichever one is attractive in a particular year, and usually that's going to be confirmation bias to some of your biases of what you believe about the world, etc.
The last caveat I'll give is if you're going to use market forecasts or even historical forecasts, don't apply your opinion to those forecasts. So, let's say you use the Vanguard. They say 6% for equities and 4% for bonds, and you say, well, yeah, I like that equity one, but bonds, I think it's going to be four and a half. So, I'm going to change it too there. Don't put your judgment on top of somebody else's judgment on top of historical.
You take away the integrity of your entire process.
Whichever one you use; it doesn't really matter to me because they're all wrong. Historical data is wrong. Forecasted data is wrong. I'm not that concerned with it. I don't feel like if I get more precision here, I'm going to get more accuracy in the planning that I do. So, I just don't spend that much time on it. I don't think about this stuff.
All right, so that's the short answer. Now, let's unpack what we're talking about here in terms of capital market assumptions, what they are, what the intent is here, and how I got to my judgment call.
From a broader understanding of what the heck is going on in especially retirement planning software, this might help some of you have an appreciation for how inaccurate these things can be, and you can understand a little bit more of what's going on behind the scenes.
Alright, so what are we talking about here? Well, when you do retirement planning, you have lots of assumptions you have to make. Now, unlike the idea of a weekend trip, what the weather looks like, we're actually trying to forecast say over 30 years, let's assume you're age 60 and you assume you're going to live to 90.
We have a 30-year period in this instance that we're trying to figure out what we're going to spend, what inflation is going to be, what taxes are going to be, what my returns are going to be. We have to figure out how we're going to do those calculations, etc. There's just so much we're trying to make assumptions on that we have to make assumptions on in order to do a forecast, and we know none of them are correct.
So, if we have all these assumptions we have to make, one of them, and this is specifically what Howard's referring to, is what we call capital market assumptions. Meaning that, let's assume you have a million dollars, and you got this 30-year time period, and you're building a spreadsheet to do your forecast for 30 years. You're likely going to put a return assumption on those million dollars because that money is invested in some kind of portfolio, which will presumably grow over time.
So, what is that return assumption? We can use the historical data for an individual asset class like equities, or we could use a blended return. But we have to have some number there of what that asset's going to grow like year by year. Whatever that return assumption is in spreadsheet form is going to be what we call linear, meaning if you assume it's a 6% return, it's going to grow 6% every single year. Now, that seems like a reasonable assumption, but when you understand when you're doing withdrawals from portfolios, that linear assumption of every year you get a 6% return can easily overestimate what you're going to have because you're not accounting for, hey, what happens if I have three bad years up front and I'm taking money out? I've exacerbated it and I can never get back to even. So actually, linear returns are problematic in that sense.
What a lot of people use, including me, are financial planning tools that use what's called stochastic modeling or Monte Carlo scenarios and you've likely used something like this if you'd use retirement planning software, and what they do is rather than use a linear 6% per year, they take your cash flow plan of what you plan to spend and the income sources that you have, and they make a thousand carbon copies of that 30 year time frame of your life. Everything being exactly the same, how taxes are taken out, the ordering of withdrawals, etc. Then they have one variable, and that is what returns you receive.
Rather than, say, you get 6% every year, it's going to factor in the variability around the average, because you never actually get average, and you need more capital market assumptions to do that. So, let's go through the assumptions you need to make, and this gets to, do we use historical, or do we use forecasted?
In order to do that kind of modeling, first we need to know what asset classes we are going to invest in with our portfolio. You have stocks, large cap, small cap, international, emerging markets. You could slice and dice what we call an asset class or an area of the market in lots of different ways.
But for our example, let's just assume it's U. S. stocks. international stocks, fixed income, and cash. That's what's on the menu for you to put your million dollars in, in this portfolio in order to model. So, we have four asset classes. Now we know we have large, or U. S. stocks, international bonds, cash. In order to model those and account for how they move around their averages, we have to choose what's called an index or a benchmark that represents each one of those asset classes.
So, U. S. stocks as an example. Well, what do we use? We could use an index like the S& P 500. We could use a Russell index. We could use a total market index. We have to choose the benchmark or the index that represents that asset class. And we would do the same thing for fixed income, international markets, and cash, because that's where we're going to get the data, right? Once we have that chosen, we have to choose the mix of assets that we have in our portfolio, that asset allocation decision. I have 40% in U.S. Stocks. I have 20% in international stocks. I have the rest in fixed income and cash to get to a hundred percent. Each one of those asset classes is going to have its own attributes, and then the portfolio as a whole is going to have its blended attributes. So, the assumptions that we need, unlike the spreadsheet model where it's just the return assumption, we need to have two more variables there.
We need to have the average return, which you would need in a spreadsheet. But you also are going to need what's called standard deviation, which is just a statistical term that measures the variability around the average. So, if we say equities average 8% a year, we know you don't get 8% per year. Some years, like last year, you lost over 10% in equities, right? Although the average is 8, you don't know what you're going to get. The measurement of that variability is what's called standard deviation. Simple way of understanding that is In Dallas Fort Worth, where I live, the average temperature is around 72. Today, it's 107. In the winters, you can get down into the teens or the 20s. So that represents the variability around our average temperature. So, if I were to tell you it's, yeah, we average 72 degrees, it's not very helpful when you never actually are close to the average because you have these extremes on the cold and the hot side. That has a large standard deviation around our average temperature.
Whereas if you go to San Diego, it has an average temperature right around 72 degrees. But the high for them, let's say, is 90. That's really, really hot for them. And the low is 50. So, although the average is the same as it is for Dallas Fort Worth, the variability is a lot tighter. It has a smaller standard deviation.
Then the last assumption you have to make is what's called correlation. How do they interact together, since we're going to have different asset classes together that have different average returns and different standard deviations, and a correlation just measures how they move together.
A plus one correlation means they move exactly the same. A negative one means they move exactly opposite. Most are somewhere in between and usually positively correlated. See how we're getting our geek hat on here? This is what's happening behind the scenes. Most likely in your retirement planning software, because when you're doing the Monte Carlo scenarios in your portfolio, in the software, it's going to run a thousand carbon copies and use these assumptions to vary the return so you get an idea of what percentage of the time with this randomness of returns, could you achieve the spending goal?
Now, when you have that portfolio, also what's happening in the software is it's assuming if you have an asset allocation of 50% stocks and 40% bonds in whatever classes you've chosen, it's assuming that any assets for available investment are invested exactly like that portfolio, and they're rebalanced regularly exactly to that portfolio and there's no deviation of that over those 30 years.
Lots of big assumptions in here and so this is what we're talking about. So Howard's argument, and I'm summarizing how it is, just using historical data. Look, the U. S. has had a hundred years of economic summer of industrialization, post war consumerism, yada, yada, yada, yada. We can't assume that that's going to go on forever. He mentions Wade Pfau, who has examined other countries where U. S. has been the outlier the last hundred years. No reason to expect that they're going to continue because of technology, because of demographics, et cetera.
A lot of that is valid. We don't know what the future holds. Well, one is we're not just investing in U. S. markets. A globally diversified portfolio is what I feel is best practice. It is true that we've gone from a U. S. centric world economy to a global world economy. So why not adjust to current market conditions?
A few reasons I choose not to. One is that historical data incorporates the current environment into a larger thread of history, meaning that all of these indexes, let's take the S& P 500, are changing the constituency of that index consistently over a very long period of time.
We've seen sectors move out of the index. We've seen sectors move in. We've seen sectors have a much higher weight in that index. All of the index providers are always trying to encapsulate what the world economy looks like based on the equities within their index. So as an example, if you look at the S& P 500 and you look at the percentage of technology within the S& P 500, it's significant relative to what it was 20, 30 years ago. So, some of this is getting captured in all of this. And historical data is capturing globalization, bear markets, bull markets, market corrections, high interest rate environments, low interest rate environments, high inflation environments, low inflation environments. All of that is captured in those statistics. Maybe not as aggressively as a forecast, but it is being encapsulated as a long-term capital market assumption.
We already know that it's inaccurate, but adding forecasted assumptions already on top of inaccurate data is just adding more noise to the data with really, in my opinion, no confidence that anybody can forecast future returns consistently enough for me to pay attention to. Because we're doing long term forecasting, not over the weekend forecasting, this makes a big difference.
Case in point, over the last year or so, I've had a lot of discussions about inflation assumptions. The inflation assumption I use, which is historical, is two and a half percent. Whoa, that seems low. How could you be at two and a half percent? We had like eight percent inflation last year. And I've had these discussions of, we need to change our inflation assumption significantly higher because inflation's here to stay and look, we're at eight percent. How can you use two and a half? Well, that's what the historical data is.
If I change it, based on what is happening right now, I'm adding a ton of noise to my assumptions, which has implications downstream over a 30-year model. We'll stick with inflation. My preference is, rather than capture inflation by messing around with my inflation assumptions significantly every single year, what I would prefer to do is update my forecast on spending each year to reflect the actual spending that someone is doing, which will capture high inflation, low inflation, et cetera.
So, if inflation is running 8% and I have a client where their spending is actually increasing by 7%, we're going to use that new baseline to apply the long term assumption going forward. Similarly, when inflation moderates, and their spending is increasing, which is the majority of time in the last couple decades, where their spending is remaining relatively constant or increasing a little bit, then we'll just use that number. We can capture the variability through the process without having to try to predict it or make some dramatic change in assumption that we hope were right.
So, in my view, there is so much stuff that we have to focus on to rock retirement. All of these models are wrong, all the forecasts are wrong, the historical data is wrong, and we only have so much time to do this, so we need to spend our time wisely on things that can have a material impact to our life, and that we have control over execution of this. There's a lot of things that are above the line and changing my return assumptions and trying to forecast better is not one of them. There's not enough meat there for me to spend too much time on that. I would much rather have a framework to manage uncertainty than to try to eliminate uncertainty by tweaking assumptions.
So, long answer. Now let's get back to the point. What is the intent of doing these Excel spreadsheets or doing forecasting using retirement planning software? I think we can confuse the intent. In that we're trying to be more accurate so we can have more certainty, or we can minimize or eliminate the uncertainty of things.
The true intent of all of this exercise is more informed decision making today. So, I use software and these capital mark assumptions in what I call the feasibility pillar of Rocking Retirement. It's a feasibility study. It's a point in time assessment of the long-term feasibility, given a ton of assumptions, of my current spending model. It's a point in time measurement of that. It's a point in time measurement of the feasibility of various pathways of what life could be. of what if I spent this much more on these things in this sequence? What if I earned part time income in this sequence and in this amount? What if I repurposed this asset to buy this asset? What if I took more or less investment risk? How does that impact the feasibility of this 30-year projection at this singular point in time?
That is where the utility of these tools is very valuable, and then it becomes my favorite crutch word, iterating and taking lots of different assessments at point in time with the current data you have available at that time.
In addition, the intent of all of these assumptions is so we can run some resiliency testing, future healthcare shock, premature death, sequence of return. Howard, we can also run, what if we run at 2% lower investment returns. I think a sensitivity analysis of that is a valuable tool to do that. I just don't want to bake in forward looking predictions into a point in time assessment that we know is going to change and change and change.
So that's the logic behind my decision to focus on the historical rate of returns. If you decide you want to use forecasted returns, I suggest, follow those caveats. Have one that you really have high confidence in. Don't change that one or have a dang good reason for changing it. And then, third, don't put your opinions on top of it because all of those things would just degrade the quality of your process.
So hopefully Howard, that helped answer your questions about my thoughts on it.
WHAT I SOUND LIKE AT 75% SPEED
Now let's go to a little bit of comic relief shared to us by a listener. I think it was David.
David said he really enjoys a podcast and he decided to listen with his wife a second time on an early morning drive through the mountains of Arkansas.
I'm reading his words now. "It sounded way different" David says. You were slower? It was almost like you were slurring your words. Told my wife how good it was, but the second time around, I think she was wondering who I was listening to, and I was scratching my head, and after a good hour and a half, I realized I was playing it at 75% speed.
I thought that was pretty funny. He says all's good. Thanks for the great material, David.
That's actually a good hack. If you listen to anybody at 75% speed, they're going to sound like they're slurring to me. They just sound like they're drunk, right? How are you doing? You're ready to go. So yeah, David, 75%. I'm glad that all is good, and hopefully your wife isn't worried about me.
HOW TO RANK SPENDING PRIORITIES
Our next question comes from Jack.
Jack says,
" We are currently living on our shortfall of income after pension and social security payments by withdrawing about three and a half percent of our managed portfolio. After a year in retirement, I have decided to return to part time work in part out of a need to just use my skills that I've accumulated and in part to have more disposable income. My wife and I have not had trouble meeting our expenses, but I'd feel more secure about unexpected spending shocks. I'd like to put more money into our charitable giving fund and set aside specific sums for taxes and grandchildren's education, etc.
How do you decide to rank these priorities?
Thanks for your advice."
I think going back into pre-tirement is a wonderful thing, or can be, to one help on that mental side of decumulating assets and not getting too freaked out about that. Having income feels like a superpower. So, I think that's not a bad idea, Jack, as long as you still have the time freedom to do what you want to do.
So how do you approach doing this? It sounds like you already have a plan in place and now you're going to have extra income. A couple different ways you can go about this, but this is how I would do it.
I would recast your feasible plan of record, adding in the fact that you're going to have work income as part of your human capital. So, you're going to want to make an assumption of how much you're going to earn, how many years you're going to do this work, and then while you're recasting this, adding in that human income, you can re prioritize your spending goals, and you're going to do that in three categories.
In my mind, you're going to have your base, great life of these are the things that I have to have secure and confident that I can continue for the rest of my life, because this represents a base great life. So, there's priority number one.
Priority number two is going to be your discretionary wants, which could include travel, that could include charitable giving fund, that can include grandchildren's education, and you're going to want to prioritize those.
Which one comes first? What is the hierarchy that makes sense for you given your priorities and your values? Everybody's going to be different there. Then you mentioned a set aside specific sum for taxes. I would say that has to be part of your base great life because taxes are a fact of life. depending on your withdrawal strategy.
So go through that process again and then make this plan resilient, meaning build out at least a five-year cashflow estimate, and then map out including the income that you're going to have from this part time work that you're going to do. That's going to decrease the amount of withdrawal that you're going to take from your managed portfolio.
Then I would secure in your portfolio five years minimum of the expected amount you're going to need for your base great life over the next five years. That's going to give you the margin to handle unexpected spending shocks as well as unexpected lots of things.
At the end of this exercise, you're going to want to have some contingency fund slash emergency fund that is just there for things that you don't even know what they might be, just a buffer. Then that five-year income floor In place and then you can have at risk assets. If you're doing fine on a 3. 5% withdrawal rate, you should be able to do this. You're going to want to factor in taxes, obviously, as you reallocate the portfolio. But this is how I would go about the prioritization of these competing goals and also add in the fact that you're working.
Now, another way that I've seen people do this is not change their plan of record, but just add their work income as a side slush fund for travel or for taxes or for emergencies where we don't actually include it in the plan. That way, every dollar you earn can be tied to a vacation that you go on, or in your case, every extra dollar that you earn isn't part of the plan of record, but it can go towards your giving fund or to your grandchildren's education.
That would be another way that you could approach this. So hopefully that gives you some concept. I think it's really important, by the way, to go through a structured process like that, because it will help you stay focused. Because when you look at all the dials, it's easy to get confused and really not make any progress on this.
So that would be my suggestion for you, Jack.
INSURANCE OPTIONS BEFORE MEDICARE
Our next question is from Bev, related to healthcare before Medicare.
Bev says,
"I'm self employed as a Viking cruise agent, my husband works for Cisco and has Cigna insurance. If he retires before 65, what are the insurance options other than COBRA?"
Well, Bev, I want to start off and acknowledge that you're a self-employed cruise agent for Viking we just did our first Viking cruise from Amsterdam to Basel, Switzerland, so up the Rhine River. Viking was amazing. I've known a lot of people that have gone on cruises, specifically these kinds of river cruises, and Viking was top notch. Totally do it again. I'm not really a cruise kind of person, but this one, if you liked cruises and you wanted to go explore the world, I would say Viking is a good option.
So, it's got to be an easy job for you to be a cruise agent for them because you have such a great product. So, bravo you.
So right now, it sounds like you're on your husband's insurance, but if he retires before 65, what do you do for health insurance? Well, obviously you have COBRA which means you could continue his insurance for 18 months, and then maybe that will bridge the gap between his retirement and both of you being 65.
Other options, whether it's because you don't want to use COBRA or you have a bigger gap than those 18 months you mentioned, is to go to the Affordable Care Act exchange, the ACA exchange, and him retiring would be a qualifying event. So, it doesn't matter what time during the year, and you would go through the process of applying for health insurance in the ACA exchange or the state network, depending on what state that you live in.
It's actually a relatively simple process. You go to healthcare.gov and you can establish an account and go through that process to start to get an estimate for the kind of insurance that you can get. And depending on what your income would be after he retires, you will qualify for some level of subsidy. So very rarely do people pay the full amount of the healthcare premium that is listed. Up until 2025 because they just extended it, it's capped at eight and a half percent of whatever your income is. So, if you make a hundred thousand dollars adjusted, you wouldn't pay no more than 8, 500 a year. So, you'd have to manage that, and you would have to incorporate that during the optimization phase of where do we want to draw assets from if my husband retires, that potentially could maximize the ACA subsidy that you get. So that would be where I would suggest that you go and because it's a qualifying event, you're going to have some windows around that.
But the good thing is, if either of you have any existing conditions, you are ensured insurability, regardless of what kind of existing conditions that you have as long as you apply within the timeline of the qualifying exception and then what happens is you get an annual cycle every year in the fourth quarter, you renew your plan or you can choose different plans during that open enrollment window and you'll always be able to get insurance So that would be where I would suggest that you go.
I would start off with healthcare.gov, set up an account and start to go through the process without actually applying for insurance so you can get an idea of what the cost might be given the income that you're going to have after the two of you are retired, or at least he is.
ON ESTIMATING LONGEVITY IN A RETIREMENT PLAN
Our final question for today is a comment around Our most recent retirement plan live back in January around Rosie from Jim.
Jim says,
"Hey, I've been catching up on the back catalog and listening to Rosie's saga. I think this was January of 2023. Today, I caught the Rosie webinar and was stuck by the high estimated longevity numbers. Perhaps Rosie and her husband have families who all live into their nineties, but in my family, my wife's family, they are lucky to reach 80.
I have a friend in his early 50s who said his grandmother is 94. He doesn't know anyone else personally in that age group who has still living grandparents. Rosie joked that she should die early to make her plan work, and I felt like yelling, yes! Not to be morbid, but I think sometimes these plans are too idealistic about life expectancy.
I understand your goal of resilience, and I think it's admirable, but I would love to hear what their numbers would be if you had them both going to the average U. S. life expectancy.
I love the show. You're doing God's work."
Well, thanks, Jim. I did go back and check this, Jim, and I understand your sentiment.
We're usually targeting 90 for the male, 92 for the female as the longevity in a plan and average life expectancy is lower than that. Now, nobody is average. Life expectancy is an interesting thing because every year you're alive, your life expectancy changes, right? It gets better because you've got one less year of possible stuff happening. This is a difficult one to navigate because you don't want to run short of the runway and being really aggressive on moving life expectancy to normal or lower can force spending decisions that if you're wrong on your longevity could cause you to run short of the runway.
But you do want to be cognizant of this issue, right? If nobody in your family's lived past 80 and you have genetic conditions or you have health issues, and in actually most planning tools, there's usually a basic questionnaire where you can dial your longevity up and down based on some basic questions. In fact, in our retirement masterclass, I think we refer you out to a public longevity estimator, I guess, for lack of a better term. I don't know what the link is. If we can find it, we'll put it in 6-Shot Saturday, to sort of customize this amount that you're going to estimate for how long you're going to live.
I've actually managed with clients walking this journey. I had one gentleman I can think of who has since passed away where he had had multiple heart issues and surgeries, and he was very proactive in working with his doctor on what the estimate was in terms of his realistic longevity, and it was definitely much shorter than the average. And we were working on him spending more money while he was able to do things. It was a dance that we did for four or five years of him spending an abnormal amount of money with me having some confidence, at least in my counsel to him that, hey, if we overshoot and you're one of those miracles, you're not going to be destitute.
I think 90 and 92 are good initial target estimates, Jim, because we really care about the outcomes and we don't want to undershoot the runaway, but I think yours is a valid point and there are ways to customize that. Just be careful of the unintended consequences and make sure that you're agile in managing it because between every year you live, your longevity gets longer, obviously innovation, et cetera.
A lot of things can change, but your point's well said.
BRING IT ON WITH KEVIN LYLES
Won't you be my neighbor?
Now we're going to talk about relationships in the Bring it on segment with Kevin Lyles. Kevin's my virtual neighbor. How are you doing buddy?
Kevin: Great neighbor! Good to see you.
Roger: So, what do we have on board in relation to relationships today?
Kevin: I want to talk about important questions to discuss with your spouse about retirement, ideally before you retire.
Roger: Okay, this is going to be fun. Go ahead. What's question number one?
Kevin: Well, one of the keys to having a successful retirement is to manage and grow that most important relationship you have with your spouse or life partner. Many of the retirees who have had difficulty transitioning into retirement had difficulty because they failed to set mutual expectations with their spouse about what retirement life would be like.
It's one of the big causes of gray divorce is people go into retirement without a common understanding of what that should be.
Roger: When I think about this, Kevin is marriage and lots of things can be what I call a stable disequilibrium.
Kevin: A what?
Roger: Stable disequilibrium. Which means everything works, everything is stable, but there's things not healthy underneath but because one spouse goes to work every day and one doesn't, or they both go to work every day, and then their interactions are confined to habits that have formed over years, it's stable, but it's not healthy.
Kevin: Yeah.
Roger: Retirement changes that rhythm and can easily expose the rot or the unhealthy parts underneath.
Kevin: I think you're right. As Sally and I started talking about retirement, oh, it's been six or seven years ago now. We realized that the only meaningful conversations we had had in the past decade were about the kids. We were parents, and so they were at a point in their life where they had all kinds of things going on and that was the basis of our relationship.
So, you're exactly right, Roger. We need to have some of these conversations. I know as a retirement planner, you recommend that spouses discuss the finances, right? That's a big part of getting them on the same page about their financial plan. Well, what I'm talking about today are some of the non-financial questions that they need to discuss.
But before I go into the questions, I want to sort of set the stage for what are some tips for having these conversations? I think that's as important as the questions themselves.
Roger: Very true.
Kevin: You've talked about these. I felt like, as I was thinking about this, Roger, I felt like I heard this from Roger and as to how to have financial conversations, some of the same tips apply.
First of all, choose a good time to talk. Don't hit your spouse with these questions. When he or she walks in the door after a stressful day at work, not going to work. So, schedule a time when you're both not tired, not under extreme stress, that you can relax and have a conversation.
Consider going somewhere outside of your house. Too often we have problems at home that are nagging us, right? Leave those behind. Go somewhere, maybe take a walk, whatever. Maybe it's over a glass of wine at dinner. But go somewhere that's comfortable for both of you. A nice neutral space to have these conversations.
When you're having them, give each other your full attention. Remove distractions. Don't be checking your email and looking at Facebook on your phone while you're doing it. You really want to listen and don't form your response while your spouse is talking. Listen attentively. That's how you can learn.
Then finally, try not to trade things that maybe you want for something you don't want. That's not what we're doing here. Sometimes you have to do that, but that's not ideal. The ideal is to come up with solutions that both of you are happy with rather than I have to do something I hate in order to get to do something I like. That's not the way you want to negotiate.
This isn't so much as of a negotiation as it is opening up and understanding what you both want. So, with that, can we get into some of the questions?
Roger: Can I share a couple other tips related?
Kevin: Oh, yeah, please.
Roger: One is when you're listening, and this goes back to being curious versus judgmental, you want to have a curious mindset.
One thing that can be helpful is when one party expresses an opinion or expresses how they feel about a particular topic is to restate it to them. Here's what I heard. Make sure you understand that way you can get corrected in that and they can actually know that you heard.
The second tip is, I do agree with going to a neutral place. If you can avoid it, don't sit directly across the table looking at each other, sit in comfortable chairs that are an angle to each other. Don't sit in an adversarial position on each side of the table. Try to be in a more comfortable position where you're not full on facing somebody.
Kevin: Interesting. So, it's too confrontational to be eye to eye.
Roger: It can be for a lot of people. That's why driving is a good place to have uncomfortable conversations, because people have emotional space.
Kevin: I like that. Okay, first question, and I know you will like this one because it's part of your financial visioning process, but this is not about things that cost money.
It's just, what is your idea of a perfect life in retirement? I encourage people like you do on the financial side to dream big, and I don't mean dream expensive. I just mean open your mind to the universe of possibilities for what life can be like in retirement. You've never experienced a life like this from the time you were a child through education and through your career, you've had obligations that you're not going to have in retirement. So, allow yourself to think what the perfect life would be like and compare that with your spouse.
So that's question number one. Do you like that one?
Roger: I do. I do. I think you want to get specific, right? What kind of environment do you want to live in? What do you want to live near? What are specific things you want to do in your ideal world?
I have a question related to that. Do you think it's healthy to have like a questionnaire that you fill out asking these questions and then sharing them so you're answering them, not at the moment, but in a thoughtful way?
Do you think that is good practice?
Kevin: I certainly don't think it's unhealthy. It just depends on the people involved. For me, that would be awkward to fill that out, but for some that are sort of like the written word and like to see things that might help them express themselves better than they could do verbally.
So yeah, I think it depends on the person, but it's certainly not a bad idea for anyone.
Question number two, and you wanted to go into specifics, so this one is how will each of you fill your days? You're starting with a blank canvas here. What activities do you expect to take up the bulk of your time? What are your expectations regarding family activities that you will each participate in or only one of you will participate in. Have that conversation.
You know, that's a big part of planning for life in retirement is what are you going to do to fill your days. Does your spouse have the same view? If you plan to spend eight hours a day rucking, that might not work out if Shauna expects you to have breakfast with her and lunch with her every day.
So have the conversation about how you're going to fill your days.
Then, number three is, to what extent will you do things together, and how much alone time do each of you expect and need? That's a big one, and a lot of people who, you mentioned earlier, Roger, people who are just sort of passing at the dinner table, and because their life is mostly spent in their careers, then you retire, and you are there with that person, and this is it now.
So, what kind of things are you going to do together, and how much time do you need to have alone? And that's going to vary with different people, don't you think?
Roger: Yeah, I know some people that there is no way that they're going to be in my house all day long. I've heard that statement. Not in a mean sense, but in a firm sense.
This is my house, there's no way that they're just going to mess up my system.
Kevin: Right. You know, the old saying, I married you for better or for worse, but not for lunch.
If one spouse has been going to lunch with friends for 10 years and then you show up and say, well, I'm home, honey, and it just might not work.
The next question is, though, to help with the relationship, and that is "What activities can you do together that will strengthen your relationship?" I know for Sally and me, that was one of the best things is we started doing some things together and just one on one time that we hadn't been spending, you know, we've been so caught up in the kids’ lives in our careers that what can we do together on a regular basis that will strengthen our relationship?
I know you had one, and you're not even retired that you and Shauna started playing golf.
Roger: Yeah, we golf every week, and that and walking Sherlock are things that are just natural rituals where we are able to just connect and have conversation.
Kevin: Yeah, and that's so great. Another thing Sally and I do, we go to movies together.
We have pretty common interests in movies. So, we'll go. Just have a movie night with the two of us.
Roger: Have you seen Oppenheimer yet? Is it good?
Kevin: Oh, yes. Love it.
Roger: Have you seen Barbie yet?
Kevin: Missed that one, Roger. Can you tell me about it?
Roger: I haven't seen it yet. My kids say it's amazing.
Kevin: You going to go see it?
Roger: I'm going to go see Oppenheimer, I think, this weekend.
Kevin: I have no pink to wear. I don't think I'm going to see Barbie.
Roger: I have a client who was in nuclear engineering in the Navy forever, and we were talking about the movie, and he was like, it's awesome. He said, factually, and I guess it's based off of the book American Prometheus, which of course, I bought the book, so got to check that out.
Kevin: Yeah, it was fascinating to me. I was surprised. that every physicist that I could name had a part in this movie. Everyone I could name was involved at this time in the earliest part of the century. It's just fascinating to me.
Okay, this is a big question and sometimes spouses have different views, where do you want to live in retirement?"
I don't just mean what city or which house, but what kind of home do you want to live in the city and walk to dinner, walk to the grocery? Do you want to live out in the country, and go shoot your dinner or grow your dinner? Do you want to live in a retirement community? There are so many options available.
Talk to each other. You don't have to make a permanent decision. What are we going to do for the next five years, and then as we look ahead, what do we want? Share those expectations.
This is a big one. How will household responsibilities change when both spouses are retired. Are they going to be evenly divided?
You're going to maintain the status quo that you've had. You better get on the same page with your spouse about that one.
Roger: Yeah, because some of those are more rigid than others, I guess it depends on how you run your household, right?
Kevin: Is part time work an option for one or both of you. A lot of people think they want to do that and?
That might interfere with plans that the other one has. So, a discussion about part-time work, or does one of you want to start a business, or both of you want to start a business together? Have those conversations, you'll be glad you did.
Then finally, and this is one we associate with retirement, do either or both of you want to travel? If so, where and how long? If one spouse wants to go on a six-month journey and the other one gets uncomfortable when you leave longer than a week, you need to have that conversation.
Roger: Done correctly, here's how I think about this. Done correctly, remember when you were dating your spouse before you were married.
When you're dating and you started to get serious and perhaps you got engaged, you're looking at a lot of things with fresh eyes. There's excitement about the future, excitement about bringing your household together, two becoming one, and forming all these rituals and rules and everything else.
Retirement and having these conversations is an opportunity to have a great renewal of coming together and thinking with curious eyes about what could be because you're shedding the last version of life. That's exciting.
Kevin: Yeah, you can renew your courtship, and you're right, all of these questions that we've talked about are questions that you should have already asked yourself in forming your own mental picture of what your retirement should be like.
So, it helps you with your own planning. Too many people retire and then find themselves dissatisfied, either bored or lacking meaning. Well, if you've had some of these conversations, you won't have those problems. A little planning in advance always helps.
Roger: Lots of little conversations. One thing that I think both spouses need to be cognizant of is one, usually by this point in marriage, if you've been married a long time, there's one spouse that's sort of the spokesman for the family.
In these conversations, it's easy to fall into those roles. Spokesman, non-spokesman. This is a point in time where both voices need to be spokesman, where one the spokesman needs to step back and hear the other one, and the one that is generally not the spokesman or the decision maker financially or household wise needs to lean in and be equal at the table, even if the other one's going to ultimately execute it.
Am I expressing that well?
Kevin: Yes, I think that's exactly right. You need to subordinate what your top-of-mind thoughts are. If you don't, if you take the lead and lead your spouse, you're always going to have that doubt that this is the life they wanted as well. Whereas if you have these conversations that we're talking about, you can know that yeah, you're both leading the life that you desire.
Roger: I've had these conversations numerous times, and that's actually one of the benefits of zoom is when we're talking about what we want, there's always a spokesman. It's just natural. It's the husband. It's the wife. There's always a spokesman and it takes a little work to tease out the one that is not the spokesman.
Though I have the advantage, I'm looking at them both on zoom and they don't know who I'm looking at. So, when the spokesman's talking, all I'm doing is looking at the other spouse's face and looking for signs of congruence or incongruence in what they're saying, and then trying to give that person room to say something that maybe was unsaid.
That's hard when it's just the two of you. So, it's just important to be cognizant of, I think.
Kevin: Yeah, having a third party is probably very helpful to that process to facilitate drawing out the partner who tends to stand in the background.
Roger: Totally, totally. Great questions, great things to do to build great relationships.
With that, let's go set a smart sprint.
TODAY'S SMART SPRINT SEGMENT
On your marks, get set,
and we're off to set a little baby step you can take in the next seven days to not just rock retirement, but rock life.
So, in the next seven days, since we talked so much about returns. Review what your capital market assumptions are in your spreadsheet or in your software. Just become familiar with them and make a decision on how you want to approach this.
Most of them will have the option of using forecasted returns based on someone they've licensed or using historical returns. But just review your capital market assumptions so you have an understanding. of what those assumptions are. You don't necessarily have to make a decision today, but it might help you have a better appreciation for how the software is giving you the results that it's giving you.
CONCLUSION
All right, end of the show. I want to remind you what this show is about. It's about you rocking retirement. And I care a lot about you actually taking the steps to rock retirement. We don't want to talk theory too much here. We want to do this with honesty. We want to do it with integrity. We want to be curious and always look at things with fresh eyes.
We're not going to talk about stuff for money. We're not going to have ads on the show. We're just going to try to sharpen our tools as me, a practicing advisor and your tools, doing this on your own or with an advisor. We're going to try to be as intellectually honest as we can. We are all in on figuring out how to rock retirement with you.
So, let's go do this.
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 are historical and do 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.