Transcript:
Easan Arulanantham:
How do you prioritize goals in retirement? Like not running out of money versus enjoying my retirement and spending my money too? So how do you prioritize that?
Tom Vaughan:
How do you prioritize good goals of not running out of money versus what I’m going to spend today? Right. So I guess one of the things that I really think about all the time, and this is where planning comes in for me, is, I want to know what I can spend today and not be broke tomorrow, right? I mean, that’s kind of what can I spend today without really damaging my future? And that’s critical. I don’t understand half the times when somebody doesn’t have a plan in place. How you figure that out? You just kind of guessing. And you could be right, you could be under estimating, maybe you could spend more, right, that’s kind of interesting. Or you could be overestimating, you’re actually going to run out of money before you run out of time. So the one way that we always do that is basically through this Monte Carlo simulation. So I do, I do have one I can share with you here. And so of course, with MonteCarlo simulation, we can say, Okay, what amount of spending is going to make you run out of money? And what amount of spending is most likely not going to make you ran out of money? And then you got $1? No, no, I got a budget. And so let’s say it’s X dollars, I can take that, and I can go out and say, Okay, I can spend that, you know, any way I want, maybe I’m spending too much over here, I’m gonna try to cut that back. So I can spend some more on travel or, you know, whatever it is, but now I have a budget and I know, you know, hey, I can take a $10,000 trip, or I can’t take a $10,000 trip or, you know, whatever it is, I’d like to now now, you know, there are some people that have so much money, it doesn’t matter, just like okay, but we’re talking about the average, you know, client that we deal with, they’ve got a certain amount that they can spend and make it work. And it’s really, really useful to know what that is.
So when we do Monte Carlo simulation, inside this financial plant will have all of your outside incomes that are coming in. So security, rents, pensions, those types of things. And then we’ll have all of your assets listed, right? And how they’re broken down stock bond, cash, you know, that type of thing. And then how much you’re gonna spend on all these things, you know, so here’s our first foray. We’re going to look at this, see if this works. We’re going to spend X amount on basic retirement expenses, and then you know, medical, maybe dental hearing aids, travel, Car Replacement, you know, home repairs, you know, breaking out into these subjects. Okay, now we’ve got all that in there. That’s our outflow, does it work? Well, we basically then go to MonteCarlo simulation, and the computer will run through the plan 1000 times based on incomes, assets and outflows that we just put in there and see, is it going to work? So you know, when we run it, go up, push the button. And here it goes. Okay, so that parameters that we put in there came out at 48%? Basically, probably not high enough. I mean, if you didn’t live very long, it probably works. But that’s one of the problems is we don’t know how long we’re going to live. We do have to plan financially, in my opinion, for some longevity, because that’s the problem. Okay, I’m only going to live to 80. Well, and I’m going to run out of money at 80. Okay, fine, but then all of a sudden, you’re 85 or 90, what do you do? So that’s where, you know, there’s some some, you know, interesting issues on what ages to pick and those types of things. So we go back to the drawing board.
Easan Arulanantham:
This is where we start to like downsize goals or somebody that say, Yeah, I have a child budget of $15,000 a year, maybe we have to cut that back to $5,000 a year.
Tom Vaughan:
And so we look at the different aspects of where we can, you know, kind of move things around. And then we come back with, Okay, we just kind of push the button again, after we’ve made these adjustments. And okay, great. Look, look at this one here, we got to what is it a 96% probability of success? Okay, so that number, whatever it is, so maybe you can spend more than five, if we just went from 15 to five on travel, maybe it can go back to 10. So, because one of the things for me, if somebody’s trying to really maximize what they can spend today, I want to keep that number at around 85%. And then if I run this every six months, I can tell if things are off or not pretty quickly, and then maybe we make adjustments, but I could tell somebody Okay, at 85% Here’s your overall budget, you know, for your all these things, travel, medical, you know, home repairs, you know, all these things. And that’s going to work, right? It goes spend that and then you know six months later we do it again.
We take a look and we still and all of a sudden we shoot backwards to 75 Maybe we need to adjust If it starts to grow, you know, up to 90 again, maybe we can spend more. So that’s how we do it. And so the to answer the question, you really want to prioritize not running out of money, versus you know what your enjoyment that you might get out of today, because running out of money will take away all of your joy. So, you know, so anyway, that’s, that’s the, that’s the process that we use. And I think it’s, again, knowing what you can do today, that won’t damage your future allows you to have so much more fun today. Because you know, exactly I can afford this trip. It might even be more than I thought I could afford. But I’m looking at this and run 1000 scenarios, and I can afford this trip. And when you’re on that trip, you’re pretty happy instead of having this thing in the back of your head, can I afford this trip? Can I afford this car? Can I afford to lend this money to my kids? You know, whatever it is, that’s coming up? It’s I think it’s critical to know the answer to that, at least as much as you can know. Yeah, helps.
Easan Arulanantham:
And the nice thing about these goals is like maybe you want change your goals in the sense that I want to retire a little bit earlier. Can we do that? And so how do we prioritize you know, those ages versus having enough income to your lifestyle? And so you can you can do a lot of play with that.
Tom Vaughan:
hat’s right. All kinds of scenarios that we can run through to try out and see what works and what doesn’t work. And I think it’s quite useful.