In their November 24, 2021 Kitces.com post, Dr. Derek Tharp and Justin Fitzpatrick once again tout their risk-based guardrails financial planning model for financial advisors to use with their retired clients. In their post, they state,

“a risk-based guardrails model can provide clients with a more accurate picture of how much they can sustainably spend than can models based on static withdrawal rates or withdrawal-rate guardrails” and

“movement from withdrawal-rate guardrails to risk-based guardrails represents a significant improvement in planning quality for retirees!”

Feel free to read their post if you are interested in a risk-based guardrails planning concept. While we agree that movement from Structured Withdrawal Plans (SWPs) or Monte Carlo models to what the authors call a risk-based guardrails model is a step in the right direction, we believe that what they propose is both more complicated and less robust than our Actuarial Financial Planner (AFP) model, as we previously indicated in our discussion of their proposed model in our post of March 7, 2021.

In this post, we will briefly discuss how the use of guardrails anticipated by Dr. Tharp and Mr. Fitzpatrick to adjust spending to reflect actual future experience is functionally equivalent to the automatic adjustment process anticipated under the annual actuarial valuation process in the AFP approach, and we will once again provide a functionality comparison of the two approaches to demonstrate the robustness of the AFP.

Guardrails vs. Actuarial Valuation Adjustment Process

We agree that adjusting spending to reflect actual experience is an important element of successful retirement planning. Based on our understanding of it, the risk-based guardrails model will trigger adjustments in spending (either up or down) when specific pre-established risk measures occur in the future. This method of spending adjustment is functionally similar to the actuarial valuation adjustments built into the AFP, where each new year’s valuation reflects new data, but spending variations can be smoothed from year to year as discussed in the overview sections of our Actuarial Budget Calculators.

Functionality Comparison

The following is a functionality comparison of the two approaches based on our understanding of the risk-based guardrails model.

Item

Actuarial Financial Planning Process

Risk-Based Guardrails Model

Permits entry of different assumed rates of future expected increases (or decreases) for different types of future expenses?

Yes

No

Permits expenses to be reduced by x% when first in a couple is expected to die?

Yes

No

Permits entry of different lifetime planning periods for different members of a couple?

Yes

No

Automatically adjusts plan spending for actual experience?

Yes

Yes

Reflects all assets (including home equity) and spending liabilities in model?

Yes

No

Reflects what the Kitces authors call retirement distribution “hatchet” (in which the initial retirement distribution rates from a portfolio are highest early in retirement, then significantly decline when deferred Social Security is claimed)?

Yes

Yes

Distinguishes between non-recurring and recurring expenses?

Yes

No

Distinguishes between essential and discretionary expenses for the purpose of assessing and mitigating investment risk?

Yes

No

Quantifies value of non-financial assets?

Yes

Yes

Quantifies size of Floor Portfolio necessary to fund essential expenses?

Yes

No

In our opinion, AFP is a significantly more robust planning tool and more easily understandable than the risk-based guardrails model.

Summary

While we agree with Dr. Tharp and Mr. Fitzpatrick that the move to a risk-based guardrails model represents a significant improvement over current models frequently used for planning by financial advisors, we believe the AFP advocated in this website is a much simpler and more robust approach for financial planning in retirement. We encourage you to make your own comparison.

Original source:
http://howmuchcaniaffordtospendinretirement.blogspot.com/2021/11/theres-much-simpler-and-more-robust.html

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