Help clients achieve flexible spending in retirement

By Megan Hart

After decades of saving diligently to build up a strong retirement portfolio, it can be tough to flip the switch when it comes time to stop working, said Oscar Vives, CPA/PFS, a financial planner with PNC Private Bank in Tampa, Fla. Underspending is a common issue — especially early in retirement. "It's a problem because you end up not enjoying the fruits of the labor you worked so hard to accomplish," Vives said. At the same time, many people fear running out of money during retirement, especially with inflation a concern.

For more than 25 years, financial advisers and clients have used the 4% rule to help walk this line. (Though more recent research from its creator has shown it's actually more of a 4.5% rule.) But does the rule still make sense? Vives will examine the topic during his session at AICPA ENGAGE 2022 and discuss the guardrails advisers can use to help ensure their clients can spend with flexibility throughout retirement. Here are a few of his best tips:

Use the 4% rule as a conversation starter. Vives calls the rule a reference point. Historical scenarios show that retirees rarely end up touching their principal if they follow the 4% rule — meaning they might not be getting the most out of retirement.

When it comes to whether clients should use the rule to manage their spending in retirement, "like most things in life, it depends," he said. For example, most studies around the rule focus on scenarios where retirees have 50% to 60% equities. "To the extent that someone's portfolio or risk tolerance has lower equity allocation, I don't know if 4% is a good metric," Vives said. He's seen cases where a more personalized spending strategy would have enabled people to retire several years earlier.

Understand spending at the various stages of retirement. While the 4% rule recommends clients withdraw the same amount each year (adjusted for inflation), it's important to recognize that spending needs vary throughout retirement.

Some experts now divide retirement into three periods: go-go, slow-go, and no-go. The first phase is typically the most active, when retirees are embracing things like travel and the hobbies, Vives said. The second phase is when their pace declines, and the third is when their medical expenses outpace money spent at restaurants or the country club, he said.

Considering these different phases can help financial planners ensure their clients don't regret missing out on experiences early in their retirement due to fears of overspending. Of course, these periods vary from person to person, Vives cautioned. Retirees who prefer a quieter lifestyle may not see a big difference between go-go and slow-go, and some people may experience greater medical expenses.

Recommend dynamic spending strategies. Retirement is different for everyone, and that means retirement spending varies, too. The 4% rule can be difficult to follow in the real world, Vives said. Most families know their baseline operating costs, which usually won't change dramatically after retirement, and retirees won't typically reshape those expenses to ensure they match 4% of their nest egg, plus inflation, he said.

In his session, Vives will talk about helping clients get the most from their retirement income. One of the best ways to do this is by employing a dynamic spending strategy. "It's intuitive, and it's something we've all practiced," Vives said. "When times are good, we increase our spending. When they're bad, we buckle down." To facilitate a dynamic spending approach, Vives finds it gives clients peace of mind if he slices their portfolio into buckets: one for core spending and one for discretionary costs.

AICPA & CIMA ENGAGE 22, the premier accounting and finance event, will be held at the Aria Resort and Casino in Las Vegas and live online June 6–9. During the event you will have access to curated content developed by experts and focused on current, necessary information and updates. With seven tracks covering the profession's most interconnected areas of focus to choose from, you're guaranteed to enhance your competencies, expand your skill set, and gain industry knowledge to help you succeed in your career.

Megan Hart is a freelance writer based in Florida. To comment on this article or to suggest an idea for another article, contact Courtney Vien at Courtney.Vien@aicpa-cima.com.

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