I remember when the SP500 hit a market high in the year 2000 and didn’t pass through that peak again until 2013! I was toiling through those years, including the tumultuous 2008/2009 markets, and feeling that I was not getting any growth in my assets and my financial goals. However, I was making progress because I was still adding to my investment accounts, whereas if I had retired in 1999 like my older brother did and had to sell investments during the next 14 years to pay living expenses, I would have irreparably damaged the longevity of my portfolio.

As I approached retirement, I did research on how to generate cashflow for paying living expenses from a nest egg of investments. I did months of research and came across some excellent work by Wade Pfau and Michael Kitces on the “sequence of returns” risk and how to mitigate it as much as possible. In a nutshell, sequence of returns risk says that if you retire recently before a market pullback, setting a withdrawal rate based on the 4% rule (for example) will be taking too much out of your investments too quickly because the 4% was based on an inflated market valuation relative to current market reality. This resonated with my experience from 2000-2013 and made me think that I may need professional help for building a retirement plan.

I held meetings with some CFPs and some “financial advisors” (previously known as “brokers”) who offered to build a retirement plan in their RIA’s software to see how much I could spend sustainably through retirement. They did this work in the hope that I would then let them manage our accounts if I agreed with the plan. The process starts with making underlying assumptions, like “how long will you live?,” “how long will your spouse live?,” “ what do you estimate average inflation will be?,” “what are your detailed living expenses?,” etc., along with collecting current portfolio assets/values. They plug all this into their planning software package, it runs some Monte Carlo simulations, and spits out a 100+ page plan, with the punch line being a confidence factor of not outliving your money before death. I received these plans presented with much fanfare, but I ended up disappointed.

What are some of the problems with this? Here are only a few:

• Assumptions – as everyone knows, a model is only as good as the assumptions upon which it is built. If any assumptions vary (likely over a 30-year retirement) – for example, average inflation level – the whole plan is shot because of variance magnification over many years in the plan.
• History repeats itself – Monte Carlo simulation applies all the historical market return sequences and then gives a percentage of likelihood of plan success. All I know is that I’ve already seen many “black swans” in my investing life – events that were supposedly never going to happen, like Black Monday, Long-Term Capital Management collapse, Dot-Com crash, Great Recession, Covid, etc., and the future may have these events closer together or on top of each other, unlike in history.
• Cashflow generation details lacking – the plans each showed how the portfolio changed year-over-year during retirement, but didn’t explicitly show how cash was being generated to cover our living expenses. Retirement accounts were debited in the models, but which sales to execute, to what specific assets, weren’t detailed. The “experts” said that they would do that work each year for us!?!
• Life is constantly changing – when “experts” manage the software and control your access to it, changing assumptions or life events requires meeting(s) and follow-up to adjust the model. Inevitably the plan just sits there and is stale the minute it is created.
• No built-in “sequence of returns” risk mitigation – the plan results from several different software packages were shockingly similar (the pretty output presentation was different) and the plans didn’t automatically incorporate mitigation to some of the risks that I expected, like sequence of returns. This shook my confidence in the plans.
• Presented with such certainty given so many unknowable events – I found that the “experts” presented these 30+ year plans with such certainty and treated the output as gospel. I didn’t like that, as clearly these plans have to be living documents.

I came to realize that this was more about finding a solution that fit my needs and eased my concerns, along with requiring a change in my expectations for such a plan. I wanted an easy fix, like the 4% rule, that was “set it and forget it.” I have come to realize that such a solution cannot exist given the complexities and uncertainties of planning for a 30+ year horizon. So I was going to need something that allowed me to forecast the next 30+ year period based on the most recent and updated data I had, that was accessible to me so I could keep the plan current, and that could be complemented with other tools to fill obvious gaps. The retirement plan itself was really just to give me some confidence that decisions I’m making today likely won’t starve us later – so just a periodic sanity check and not a detail roadmap.

So I built a retirement plan model in Excel that is based on my assumptions and runs out for 35+ years. Then every 6 months or so, I update my current portfolio balances and expenses in the free version of NewRetirement which runs 500 Monte Carlo simulations to give me a confidence factor that I’m not off-track. I complement this retirement plan spreadsheet and NewRetirement with an annual expense budget to guide spending (I track actual expenses against plan using Quicken), a detail cashflow plan (mostly a Treasury ladder with maturities set every six months to cover expenses), and my annual estimated tax plan with payment schedule. All together that suite of tools provides me the guardrails I need to sleep at night. I still may need to be flexible with my retirement spending in the years ahead if the markets hit a rough patch for awhile like they did from 2000-2013 (God forbid) and the NewRetirement confidence level drops as a result.

As for my retirement spreadsheet, I did build into my model safeguards for sequence-of-returns risk, traditional-IRA to Roth-IRA conversions, IRMAA implications, Social Security claiming strategy for me and my wife, pre- and post-Medicare medical costs, annuities, tax-deferred/tax-free/after-tax taxation on various retirement accounts, and more. Each of these topics could (and may be!) its own blog post. Further, when any financial advisors approach me about managing my money (and if I’m impressed with them), I share my retirement spreadsheet model and approach, and ask them for a critique. So far, so good – no one has been able to poke any holes in it, so that gives me some confidence since I’ve had many sets of eyes on it.

The bottom line is to find (likely a suite of) tools that work for you based on your needs at that time. An easy and accessible web solution like NewRetirement is sufficient as a solution for retirement planning during the accumulation years, but I bet you’ll want more capabilities and supporting tools to help once the paychecks stop!