EXECUTIVE SUMMARY
“How much can I spend in retirement?” is perhaps the most fundamental question a client brings to their advisor. Answering it well requires a range of assumptions – from estimating average investment returns to understanding correlations across asset classes. These assumptions are rooted in Capital Market Assumptions (CMAs), which project how different assets might perform in the future. However, for many advisors, using these assumptions isn’t always comfortable. Advisors want to help clients set a secure, reliable retirement plan, yet even the most comprehensive assumptions will inevitably deviate from reality at least to some degree. Which poses the question: How much error is acceptable, and how can advisors use these assumptions to set reasonable expectations for clients while maintaining their trust?
In this guest post, Justin Fitzpatrick, co-founder and CIO at Income Lab, explores how well CMAs reflect the realities clients will face, the influence these assumptions have on client advice, and how advisors can balance planning assumptions against the risks of long-term inaccuracies.
Ideally, retirement spending would align perfectly with a client’s needs – neither too much nor too little. Yet, even with the most accurate CMAs, financial advice rarely aligns flawlessly with reality. Sequence of return risk, for example, means that even 2 identical clients retiring less than 18 months apart can experience wildly different sustainable spending levels. In some historical periods, the amount that a retiree could safely spend in retirement would have looked incredibly risky at the beginning of their retirement – and vice versa. Beyond market variables, clients bring their own behaviors and preferences into play. For instance, many retirees begin retirement by underspending to avoid depleting their resources – a choice that often diverges from the ‘best guess’ assumptions of CMAs and creates additional room for unexpected market conditions.
The good news is that CMAs can still provide a range of realistic spending limits, and, even better, most financial plans are not static one-and-done roadmaps. Advisors who actively monitor and adjust a client’s plan as markets shift can mitigate the inherent uncertainty of CMAs, reducing the risk of overspending or underspending over time. Importantly, CMAs are most valuable when viewed as flexible tools rather than fixed forecasts – allowing advisors to refine assumptions as markets evolve and client needs change. This adaptive approach not only helps clients navigate uncertainties but also distinguishes advisors who are committed to continuous monitoring, enhancing client satisfaction and peace of mind.
Ultimately, the key point is that while ‘perfect’ CMAs may offer accurate predictions about general market conditions, they will still fall short of telling a client how much they can spend. Market fluctuations, sequence of returns, and personal spending behaviors all create unpredictable variations that CMAs cannot fully capture. However, by proactively monitoring and adjusting portfolio spending, advisors and clients can take advantage of the high points, guard against the lows, and, overall, ensure greater peace of mind!
See the full article on Kitces.com here: https://www.kitces.com/blog/retirement-planning-right-capital-market-assumptions-cma-spending-limit-variables-advisor-behavior-client-needs/?utm_source=linkedin&utm_medium=social&utm_campaign=wednesday_ce
