On this episode of The Long View, Roger Whitney, senior financial planner at Agile Retirement Management, host of the popular The Retirement Answer Man podcast, and author of Rock Retirement: A Simple Guide to Help You Take Control and be More Optimistic About the Future, discusses retirement planning, annuities, and everything you need to know about today’s volatile markets.
Should You Adjust Your Retirement Plan?
Jeff Ptak: There’s probably a strong temptation right now to make adjustments to a retirement plan in order to hedge against inflation to protect the assets better against it. Some of the assets in some of those buckets or slices of your pie are really there in order to protect against inflation. What do you say to those who want to go in and maybe add some commodities, sprinkle in some other supposed inflation hedges to basically keep them sticking to the plan?
Roger Whitney: That’s the tactical temptation that is always there because all we hear about, for the most part, is the financial bling of planning—all the shiny things that seem cool but lose their luster very quickly, and they end up in the bottom of the closet. Rather than talking about the financial bling, you want to keep the main thing. The main thing is retirement outcomes, the life that you want to live. And if you use a process that gets that vision, makes it feasible, thoughtfully think through how to make it resilient, and then optimize it. We predecided a lot of things for a purpose, so we didn’t have to make these decisions when inflation spiked or the markets went down. We didn’t have to make short-term decisions that are reactionary. And that’s really hard because the temptation is always there because the bling is what’s on 24/7, depending on what you put on the TV or whatever.
Decision-making processes are the key to all of this, so you can be agile. In terms of dealing with clients and their wanting of this, most of them don’t. And if they do, my tactical way of dealing with that is to continually walk through why this works, how we thought through this to bring them back to center, and then if they’re really motivated to do something, to carve out a piece where they can express a very firm opinion with monies that aren’t going to put the feasibility and the resilience of the plan at jeopardy. I think that’s a really important aspect of this. I’m like, fine, you want to be in commodities, we’ve walked through it. Here’s X amount, go open up an account over there. Knock yourself out. If you lose all that money it won’t matter to your life, but you’ve been able to express your opinion. And I think that’s the fallback position. But to be honest with you, because of the clients that we work with anyway, they all are of the same mind and have the same worldview, so they’re generally not interested in those things to begin with.
How Much Mad Money Should Be in Your Portfolio?
Christine Benz: How do you figure out what that percentage of portfolio could be mad money? Or does it depend on the clients’ financial wherewithal?
Whitney: When you’re thinking about that percentage, Christine, are you referring to an annual basis or overall?
Benz: The total portfolio. If you just were to say, “I think you can take X dollars and go nuts with it. I’m not worried about you losing it all.” How do you figure out what that could be in terms of the percentage of the portfolio?
Whitney: How would we think about that? “Roger, I want to buy some commodities. I’m worried about inflation. I think commodities are cool. How much can I do?” That could be the same thing as, “Roger, I want to buy a sports car. How much of a sports car could I buy?” It doesn’t really matter what it is. So, what I would do is take the plan of record, which we would have established, and then create a what-if scenario and say, “What if we took $100,000 out to buy the sports car, commodities—doesn’t really matter what it is—then what impact does that have to the resilience of the plan?” And we’ll be able to see that whether it’s using a household balance sheet or using Monte Carlo simulation, we’ll be able to make that judgment at least in an organized way. And then, if it looks like this is fine, then we have to go down more tactically. Where do we get that money because there might be some tax consequence? So, we’re constantly creating what-if scenarios.
And then, the kind of scenario that we’re describing here, Christine, is very different than, say, “I want to buy a lake house,” because when you want to buy a lake house, that’s a decision with some obligation to it. It’s not just a one and done. You buy your sports car; you lose money in commodities. There’s no journey after that. It’s done. But if you buy something that’s much more permanent, now you got taxes, you got upkeep, you got all the journey along with it. So, those ones you will really want to slow down a lot more.
Should Retirees Cut Spending?
Ptak: Many retirees have heard that one of their best responses in the face of a tough market environment is to cut spending. Inflation, of course, makes that difficult. How should people manage their withdrawal rates in an environment like this one?
Whitney: It’s a good question. I don’t think of life in terms of withdrawal rates. I don’t like withdrawal rates as a framework for thinking about retirement. I think it’s a horrible way to have to live a life. But there are times when you have to make adjustments. The way that I would approach it is, you really want to get dialed in: What do I need to live my base great life? I define a base great life as the non-negotiable. That’s obviously the housing, the medical, the food, the shelter, all the things that are base, but it’s not a rice-and-beans kind of life. You want to have some very basic travel, some basic entertainment. But that’s the marginal line that we don’t want to have to cross. That should never have to be compromised in the plan that you build—God willing, never compromised.
And then, you have all the discretionary things that you add on top of that. If you think of a plate of spaghetti, the base great life is the noodles. You have to have the noodles to have spaghetti. And then, you put on these more discretionary things: I want to have some extra $5,000 a year for the next 10 years. That’s some sauce that you put on there, and then maybe you add some buying a mountain bike, that would be on my sauce, and then you can add on these wishes or the more aspirational things. You can look to make adjustments in the sauce and then in the spices. Because I think it’s a really good idea to make adjustments there when times are rough for a couple of reasons. One is, it definitely helps the plan. You spend less money. It makes your income floor longer. It helps keep investments longer. So, it definitely helps the cause. But the other part is people want to do something. People get it; the world is rough. And when I have bear-market calls—and we did this in the quick bear market of COVID when the floor was dropping out of everything, I had, I think, 80 10-, 15-minute calls with everyone that we work with. And the structure was the same—this is horrible. Listening to them talk about how it’s horrible and agreeing and affirming that, giving them perspective that they’re going to be OK, and we’ll get through this, and then helping them see that, assuming that’s the case. And then, brainstorming what does this make possible, and then, leaving with an action item.
So, I never left a meeting without an action item. I think one person was cutting their Netflix, because at that time, we thought the world was ending, COVID-wise. But I knew that person cutting their Netflix account wasn’t going to make a material difference to their life. But the last thing you ever want to think about when things are tough is, “Oh, just hold on. In the long run, it’s going to be OK.” That’s a trope for advisors that any client could tell you. That’s not enough because that robs people of their agencies.
The way I would answer that is you want to know what your base great life is. That’s the one you don’t want to ever have to cut, and you want to plan thoughtfully so you don’t have to cut it. And then, I think being agile in those nondiscretionary things, I think that’s perfectly appropriate. I think we bought some generic paper towels that disintegrate in your hands. My wife naturally made a decision: “I can’t pay that for Bounty. It’s inflation—look at what they just raised it to. I’m going to buy this one.” We naturally want to do those things and do them whether we’re asked or not, and I think that’s actually a healthy thing to do.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.