The so-called “4% rule” safe withdrawal rate is one of the most popular ways to talk about the sustainability of retirement income, yet ironically no financial planning software solution has ever been created to illustrate the safe withdrawal rate approach. In part, that’s simply because most financial planners jump straight to the stage of collecting detailed client spending goals, and illustrating their actual financial plan’s probability of success in retirement. And in part, it’s because the original safe withdrawal rate research used very simple assumptions – from a two-asset-class portfolio, to ignoring the impact of fees, and a fixed 30-year time horizon – which just doesn’t hold for a wide swath of retirees.
To fill the void, though, two new software solutions have recently emerged for financial advisors, specifically to illustrate the safe withdrawal rate approach, and be able to model the impact of varying assumptions, from a wider range of asset classes, to the impact of investment expense ratios and advisory fees, and time horizons that may be longer or shorter than 30 years.
The first, dubbed the “Big Picture App”, draws on available historical investment returns from the Center for Research in Security Prices (CRSP) and Global Financial Data (GFD), to show how ongoing withdrawals would have sustained (or not) for any time horizon (and any ongoing expense ratio) the advisor wishes to assume. The second solution, called “Timeline”, goes further, and can even illustrate the impact of various dynamic spending strategies, from Guyton’s “Guardrails” approach, to the Kitces “Ratcheting” rule for retirement spending, and show how much wealth is often left over at the end of the 4% rule time horizon.
Ultimately, software like Timeline and Big Picture won’t realistically replace full-blown financial planning software to analyze the details of an individual client’s situation, but can be a powerful solution to facilitate client conversations around what is a “sustainable” withdrawal rate (or not), the consequences of sequence of return risk, and the impact that diversification and managing investment costs can have on retirement outcomes. The software may be especially for beginning to educate prospective retirees, or outright prospects who haven’t yet engaged the advisor for a full financial plan in the first place.
But the bottom line is simply to recognize that the safe withdrawal rates approach can actually be adapted to far more client-specific circumstances than just assuming a 2-asset class portfolio and a 30-year time horizon (with no investment costs) for every client. And now the software exists to actually illustrate it, and have productive conversations with prospects and clients about sustainable retirement income!