Transcript:
Easan Arulanantham:
I saved a lot for retirement, I’m heading into retirement, how do I figure out how much I can spend?
Tom Vaughan:
This is actually one of the biggest questions we get on a constant basis actually is just, you know, how much money can I spend in retirement? Either it’s a complement to this is how much money do I need to support this amount of spending? You know, so, but those are flips of the same question to a certain degree. So now I’m heading into retirement, or I’m just retired or whatever, along those lines. And I kind of want to figure out what my budget is, and whatnot. And there’s all these different rules that you can use, you know, you can take a 4% withdrawal. And but if you really dig into the 4%, withdrawal, there’s some there’s some caveats to it, you know, you’re looking at, you have to be the right age kind of need a 30 year retirement for that to work. But let’s say you’re at five, I mean, I take more than 4%, most likely, right. And so that’s where the MonteCarlo simulation comes in. And again, you know, I’ll share that with everybody here. As far as that goes, again, here we go. Right. Somebody wants to know how much they can spend. And so we’ve put in all of their expenses that they’ve got now, as much as possible that we can identify, we build in, you know, all of their incomes that are coming in Social Security, pensions, rental income, those type of things. And then we look at, you know, what their asset base is and how that’s constructed, where it is, how much is in the bags, how much is in stock market, how much is in the bond market, we get all that in there. And then we can run this Monte Carlo simulation. And you guys have seen this before. But essentially, we push this button, and we’re able to run 1000 scenarios. And in this particular case, 916 were successful. Right? So what would we do if we want to figure out the max they can spend.
Easan Arulanantham:
So if we want to, like, you know, push the limits, we would solve for 85%. And so we have a super solid functionality, and essentially takes our inputs and says, what can we do spending wise and I’ll usually a bump up your spending a little bit, and they’ll get your 85. But longer the time horizon, like longer your retirement is less that bump will be so if you have a really save your 85 and you expect only to live to 100, that 15 years versus someone that’s in their 70s and expects to live to 100, that bumps gonna be different.
Tom Vaughan:
Yeah, we literally have a super solid, but in this particular program, and we can say, solve for 85% probability of success. And we can have it just solve for how much money can be spent per year to make that happen. And we can update that and continue to look at that or what have you. But some people really like that they just want to know the budget and know that they can feel like okay, that works. Good when they’re traveling, you know, budget for travel, right? Okay. I’m going to pick three trips, ones, expensive ones medium, and when it’s cheap, Which one can I really afford? Because it sure makes that trip a lot more fun.
Easan Arulanantham:
When you can go, knowing what you can afford. That’s a huge deal. Yeah, guilt free trip!
Tom Vaughan:
Yeah, that’s right. Because that’s just my personal thing. Whenever you make a purchase that’s above and beyond what you probably can really afford, it could be anything. Car, I’ve done that before, you know, trips and those types of things. You know, you drive around in this nice car, but then you have this whole feeling of I can’t really afford this car, or I’m at this great trip. But man, we probably overdid it. And I can solve for this thing at 85% and say, Okay, I can actually afford this and man that I’m telling you, that’s, that’s a big part of the trip. The whole object of the trip for me is just mental relaxation. So knowing that, um, you know, can afford it, it really does help. And maybe I’d go on a better trip than I might have thought, right? Just because, okay, I can really do this. And maybe I’d enjoy that. So I think it’s a great question. It’s, there’s lots of different ways of solving it. But I wouldn’t do it any other way than MonteCarlo simulation personally, just again, we’ve had so much experience with this over the years. And it really seems to work. I mean, real life, it’s not just oh, we did this plan, and then we never see these people again, we redo these for year after year after year. And we’re getting okay, this works. You know, it has been pretty accurate and whatnot. And then we can see what happens in these big downturns and keep pushing these buttons. I think it’s worth looking at.
Easan Arulanantham:
So if you’re close to retirement, I think it’s time to start to go into the details. You know, dig into the weeds with your retirement and figuring out how you have to spend because, you know when you’re saving that money, you can have like a Roth, you know, knock in math to figure out how much money you need to for retirement, but when you actually get into it and you want to Retired point, you can’t really go back to work. And that’s when you kind of want to make sure that you’re in a good spot.
Tom Vaughan:
Yeah, I actually can make this argument for almost any age to. I mean, you know, we don’t get asked this all the time, because people are pretty happy with their standard of living. And I’d say they’re at 96%, like we just showed, okay, good, good, good. But it would be interesting, you know, for those people that are wondering what they could spend to solve that 85% It’s very easy, you know, we can do it, and give them an idea of what they could spend. Because sometimes things come up, and I’ve got clients that could afford more, and they don’t do it because they don’t think they could afford more. So, and that’s okay, there’s nothing wrong with that. But maybe there’s something you’re missing out on that you might have been able to do, you know, go back to visit your kids, you know, a few more times or something than you thought you could, whatever it might be, right. Everybody’s got different things that are important to them. So anyway, I think, you know, solving for maximum income, you know, spend, I think it’s useful. It would help it helps me that’s for sure. Yep.